Time for Sydney property buyers to shake off the cold

Two rays of sunshine shone brightly through the cold and often inert August 2024 Sydney property market.

One ray was the transformative extension of the Sydney Metro to include the Sydney and North Sydney CBD’s to be discussed in the months ahead.

The other discussed here, is what the near certainty that interest rates are about to drop means for Sydney property buyers.

Interest rates

The interest rate outlook changed dramatically this month following the RBA’s decision to keep the official cash rate at 4.35%.

Although that decision was expected, the change occurred because and for the first time since being appointed Governor 11 months ago, Michele Bullock fell into the 2021 trap that snared her predecessor, by providing forward guidance on interest rates.

Beginning with a post decision press conference, RBA’s Governor remarked: “based on what I know today and what the Board knows today, what we can say is that a near‑term reduction in the cash rate doesn’t align with the Board’s current thinking.“ When pressed, the Governor said that by “near term” she meant “by the end of the year and the next six months.”

While the later released RBA August Minutes reflected the above remark with “based on the information available at the time of the meeting, it was unlikely that the cash rate target would be reduced in the short term”…those Minutes added…”it was not possible to either rule in or rule out future changes in the cash rate target.”

The obvious contradiction between the first and last parts of that remark and on which others have commented, as well as the unprecedented 13 references in those Minutes to “uncertainty” provoked reactions from both the money market and major lenders which should be heeded by buyers of Sydney residential and commercial property.

The money market

According to the AFR on 30 August 2024, until Tuesday this week, the Australian money market assessed a 118% probability of a rate cut this year and that following the release of more upbeat local and US data, the probability was reduced but remains at 85%.

Earlier this month that market priced in two further cuts by April 2025.

The AFR later summed up the reaction in this excellent 27 August 2024 article:

“Market forces

“If you listen to central banks, you’ll be out of a job in the bond market,” said Christian Baylis, co-founder at Fortlake Asset Management.

The fund manager, who has been listening to policymakers for more than a decade, said central banks control only a tiny part of the interest rate path with the rest set by market forces.

“Ultimately, the market ends up determining the cash rate more than the central bank,” he said.

He stressed that supply and demand along the yield curve was key. “Central banks will never admit it, but ultimately that dictates to them what they do with the cash rate over the medium term.”

History

Bond investors have a hard time trusting policymakers who say one thing, and more often than not, do another.

“It’s not surprising people don’t believe them,” said Angus Coote, co-founder of Jamieson Coote Bonds. “The yield curve control wind-back in 2021 was the pinnacle of this.” He was referring to former RBA governor Philip Lowe’s forward guidance that rates were unlikely to rise until 2024, only to start raising them in May 2022.

Dovish peers

The global easing campaign is working against the RBA’s reluctance to reduce borrowing costs. New Zealand, Canada, the UK, and Europe have started cutting rates, and the US is expected to join the club next month.

While history shows the RBA has gone against the US monetary cycle, experts stress that it is challenging for a small open economy like Australia to counter the powerful Federal Reserve.”

Major lenders

Regardless of the RBA’s forward (mis)guidance, CBA, the nation’s biggest lender, still predicts a rate cut this November.

Of the other three main lenders, only the NAB is forecasting the first cut in May 2025 with the ANZ and Westpac each forecasting February 2025.

Given that most of Sydney’s residential and commercial property markets close for about six weeks from mid December, there is little practical significance for buyers between the interest rate predictions of the CBA, ANZ and Westpac.

As an indication of their convictions, those three major lenders are hedging their own balance sheets accordingly: in a sign that a mortgage war may be looming and with Macquarie Bank more than snapping at their heels, all three this month made large cuts to their term deposit rates with the CBA going further on 23 August by reducing some new customer variable and fixed interest rates in response to earlier fixed rate cuts by other lenders.

Three more reasons rates are likely to be cut sooner than later

While each of these has received some recent media attention, their combined influence on the inflation rate and thus, the direction of interest rates hasn’t been appreciated:

Sydney rents are falling

As the AFR reported on 12 August 2024:

“Asking rents fell 1 per cent across Sydney in the past four weeks, the sharpest monthly decline since the pandemic, in what could herald a broader slowdown in the rental market, data from SQM Research shows…

Louis Christopher, SQM Research managing director, said while the rental crisis was far from over, rental growth was likely to flatten from here.

“We’re not out of the woods yet in terms of the rental crisis, but the worst rental increases could be behind us,” he said.

“There has been a lull in vacancy rates, which means that the rental shortage is not deteriorating further.

“It also means that the days of rents rising by 10 per cent to 20 per cent are now over unless we see a major deterioration in vacancy rates, which I don’t think will happen”…

“More broadly, we believe that the federal government’s attempt to slow migration rates is working, and we are seeing a slowdown in international student demand…Despite the slowdown in asking rents, this would not be reflected in the inflation numbers for another 18 months, Mr Christopher said.

“We know the CPI data has been lagging asking rents, so in theory, we’re still likely to be reporting elevated rental growth in the Australian Bureau of Statistics data for the remainder of 2024, but we are at the point now where we can see that actual market and asking rents, are coming off”…

Sydney’s northern beaches bore the brunt of the rental slowdown with asking rents slumping by 3.5 per cent over the month. In the past 90 days, rents tumbled by 7.8 per cent.

The eastern suburbs, inner west and the CBD also posted sharp declines of more than 5 per cent over the past three months…

Separate data from CoreLogic also shows weekly rents in Sydney falling by 0.1 per cent in July as the national rental market posted its slowest monthly growth in four years…

The portion of suburbs where rents had dropped over the year had…increased in Sydney …according to Eliza Owen, CoreLogic’s head of research…

“I think this shows a shift in the rental dynamic from one where you had extraordinarily fast growth to things starting to settle down a little bit,” Ms Owen said.

“The number of suburbs where rents are falling is still small, but it’s the direction of rent growth that indicates we’re entering a new phase of the rent cycle.”

Sydney’s eastern suburb Clovelly recorded the sharpest annual rental decline at 4.6 per cent over the past 12 months.

House rents in Pennant Hills, Woollahra and Ashfield fell between 3.4 per cent and 1 per cent”…

Listings are surging

While new sales listings typically increase as spring approaches, we have never experienced a surge like the present in our 18 years of operation as reflected in the following data tracking the change in listings in the four weeks to 25 August 2024. If listings continue at this rate, Sydney will quickly become a buyers’ market – if it isn’t already:

Source: CoreLogic

This data alone suggests that after a period of surprising resilience, the high interest rates are now biting and unless reduced, price falls for all but prime properties are likely. If that happens, it will lead to negative wealth effects the RBA will be keen to avoid.

Explosion of private credit

In a topic garnering increasing attention this month, regulators are now concerned at the instability risk posed by the multi billion dollar growth of high interest rate private lending by major superannuation funds and high net wealth individuals via intermediaries mostly to commercial property buyers unable in the current interest rate environment to obtain finance from mainstream lenders.

So, what does this all mean for Sydney property buyers?

The picture is clear: it’s not a case of ‘if’ but ‘when’ interest rates will drop with the money market and three of the four major lenders saying ‘soon’.

When that happens, we expect buyers will respond strongly, property prices will rise quickly and the window of opportunity to profit from a wave of new on and off market properties will close as illustrated by this Case Study:

On 27 August 2015, we bought at auction a prime, one bedroom, eastern suburbs unit with north facing water views for $926,000.

At that time, very restrictive macro prudential credit restrictions imposed by APRA in 2014 had crushed such micro markets which, by 2018, had recovered as a result of the money market’s responses to those restrictions.

On 8 March 2018 and having done nothing to improve it, our investor clients sold that unit for $1,345,000 – yielding them a 45% capital gain in 30 months.

Final word

While time in the property market is always important, the same sometimes applies to timing the market when major macro prudential changes are pending.

Now is such a time.