Higher Auction Clearance Confirmed

CoreLogic RP Data says their preliminary results show that 67.8 per cent of reported auction results were sold this week, increasing from the dip to 65.7 per cent last week when auction volumes were lower. Data from APM on Saturday also showed an increase, though their mix of results are different.

CoreLogic says this week 2,139 capital city auctions were held, up from 1,100 last week and a similar volume compared to one year ago (2,268). At the same time last year, 77.3 per cent of auctions cleared. The trend in auction clearance rates has nudged lower over the last few weeks; across the quieter auction market last week, three cities recorded a clearance rate in excess of 70 per cent: Adelaide, Canberra and Sydney, while this week, Sydney is the only city where clearance rates are tracking above 70 per cent.

20160620 capital city

Taxing Foreign Investors Harder

Excellent post from Cameron Kusher, CoreLogic RP Data, discussing the impact of the higher tax being imposed by several states on foreign investors in the context of state tax raising – they are highly dependent on stamp duty to support their coffers. He concludes that ultimately these changes may deter some foreign investment but these changes are not going to scare off all foreigners from investing in housing market. At the same time it will raise much needed revenue for these governments.  If state governments are looking at taxes on property, they should move away from stamp duty to a more efficient land tax.

The state governments of New South Wales, Victoria and Queensland are all now charging additional tax on foreign investment in residential property.  In New South Wales foreign buyers are being charged a 4% stamp duty surcharge from June 21.  In Victoria, foreign buyers are charged a 7% tax and in Queensland foreign buyers are being charged a 3% surcharge.  All three of these taxes are specifically targeted on transactions of property by foreign buyers.

Chart 1

Property (both residential and non-residential) is already the largest source of taxation revenue for state and local government.  These additional charges to foreign investors in the three most populous states will probably raise additional revenue (as long as the higher cost of doing business doesn’t result in a downturn in demand from overseas buyers).  For each government there is a benefit in these changes outside of additional revenue, foreigners don’t vote so politically it is likely to be a fairly popular decision. Especially in New South Wales and Victoria where housing affordability is a growing problem and there is a perception that foreign investors are bidding up prices and contributing to locking first home buyers out of the market.

Chart 2

In New South Wales, state and local governments collected $14.705 billion in property taxes over the 2014-15 financial year.  Property tax revenue increased by 12.8% over the year and has increased by 80.5% over the decade to 2014-15.  Property taxes accounted for 48.5% of total taxation revenue to New South Wales state and local government in 2014-15.

Chart 3

In Victoria, state and local governments collected $12.246 billion in property taxes over the 2014-15 financial year which accounted for 53.1% of total taxation revenue.  Property tax revenue increased by 10.7% over the 2014-15 financial year to be 109.9% higher over the past decade.

Chart 4

Queensland property tax revenue increased by 12.6% over the 2014-15 financial year to be 80.7% higher over the decade.  Over the 2014-15 financial year Queensland state and local governments collected $8.267 billion in property tax revenue which accounted for 51.5% of total state and local government tax revenue.

Over the decade to June 2015, property taxes have increased by 80.5% in New South Wales, 109.9% in Victoria and 80.7% in Queensland, over the same timeframe inflation has increased by 30.1% which is significantly lower than growth in property taxation.

Given the importance of property tax revenue to state and local governments it is no wonder that the three largest states have decided to increase taxes on foreign investment.  These changes don’t impact on voters and they collect additional much needed revenue.

My concern is that it shows that none of these states have any intention of moving away from transactional taxes on property to more efficient land taxes.  Keep in mind that in a typical year only around 5% to 7% of residential properties are transacting so you are only collecting stamp duty from a small proportion of the housing market that are deciding to move.  When transactions and values slow or fall, stamp duty revenue is also susceptible to large declines.

Chart 5

In New South Wales and Victoria, governments are gaining substantial revenue from stamp duty as property values and transactions rise.  In New South Wales, stamp duty collection rose 22.2% in 2014-15, in Victoria it rose by 18.9% and in Queensland it was 12.3% higher.  Over the past decade, the total increase in stamp duty revenue has been recorded at: 125.1% in New South Wales, 116.8% in Victoria and 56.1% in Queensland.

Some of the commentary around the increases in tax have been around the fact that without foreign investors many of the new housing (particularly unit) projects would never have even commenced construction.  To me, this is really the crux of the problem.  As the resource investment boom has faded to some extent housing construction has helped to fill the void. If a projects viability is totally dependent on foreign demand, to me that suggests that it is not really a viable project. The reality is that the current home value growth phase has now been running for four years and new housing construction and unit construction in particular has hit record highs.  Foreign investment has increased quite significantly over this time however, many of these purchasers are buying units which many locals wouldn’t purchase due to the size, location and price of these properties.  Furthermore, anecdotally many of these properties don’t actually create additional housing because they are left empty and not made available for rent.

I believe that these additional charges will provide some deterrent for foreign buyers investing as the costs continue to add up with FIRB application fees and now these additional charges.  Of course, while these changes may deter some investors other will just see it as a cost of doing business and it shouldn’t impact them too much if they are investing for the long-term. If fewer foreign investors results in some new housing projects not going ahead, that is not necessarily a problem either in light of the fact that housing supply has increased dramatically over recent years and will continue to do so over the coming years given the housing currently under construction.  Finally if it means that certain developers decide to rotate their offering away from one catering to foreign buyers and towards one which is more palatable to a local market, I believe that is a good thing.

Ultimately these changes may deter some foreign investment but these changes are not going to scare off all foreigners from investing in housing market. At the same time it will raise much needed revenue for these governments.  If state governments are looking at taxes on property I would once again call on them to look for a way to move away from stamp duty to a more efficient land tax.

Latest Auction Clearance Rates Confirms Momentum

According to CoreLogic RP Data, the number of capital city auctions held this week was 1,053, falling significantly given most states and territories have a public holiday today. Preliminary results show that 67.2 per cent of auctions were successful this week, compared to 68.2 per cent last week across 2,008 auctions and 75.9 per cent one year ago, across 2,076 auctions. Since the end of March this year, the combined capital city auction clearance rate has been trending around the high 60 per cent mark, demonstrating an improvement when compared to the end of 2015, however consistently tracking lower compared to the same time last year when across the combined capitals, clearance rates were in the mid to high 70 per cent range.

20160613 capital city

Total returns show why housing investment remains so popular

From CoreLogic RP Data. Despite the recent slowdown, housing finance data highlights that investor activity in the housing market is starting to rise again and when you look at total returns from housing it’s no surprise.

The CoreLogic RP Data Accumulation Index which has been published since June 2009 highlights the total returns from residential property.  The total returns include both the increase in values as well as gross rental returns.

The first chart shows the annual change in the total returns (accumulation) index over time.  While combined capital city home values recorded longer and deeper falls during 2011-12, total returns were negative for only a short period of time thanks to the uplift from rental yields.  More recently you can see that the annual change in total returns across the combined capital cities has remained quite strong.

Combined capital city annual changes in total returns for houses and units


Over the 12 months to May 2016, combined capital city home values have increased by 10.0% while total returns have been recorded at a higher 13.9%.  Looking at the individual capital cities, all cities except for Perth have recorded positive total returns over the past year.  Sydney and Melbourne which have been the most active investment markets have seen the highest total returns at 16.9% and 17.5% respectively over the past twelve months.  It should be noted that gross rental returns in both of these cities are now at record lows highlighting that the majority of these returns have come via an increase in home values.

Annual change in capital city total returns, 12 months to May 2016


The third chart highlights the total returns over the past five years across all capital cities.  Again, Sydney in particular, has seen far superior total returns compared to all other capital cities.  Melbourne has also experienced relatively strong total returns over the past five years.  Again this highlights why these two cities in particular have remained so popular with investors.  In all other capital cities returns from residential property have been positive.  In many of these cities the total returns have been driven more so by the rental returns rather than the capital growth which has been the key driver in Sydney and Melbourne.

5 year total change in total returns, to May 2016


Despite the recent rebound in value growth, the mature capital growth cycle and record low rental returns in Sydney and Melbourne, total returns are unlikely to be as strong in these cities over the coming years.  A more balanced investment approach which focusses on moderate capital growth and relatively strong rental returns is likely to be a superior housing investment profile over the coming years.  This data also highlights why housing investment has been so popular.  In a low interest rate and subsequently low return environment housing has, over recent years, offered attractive returns.  Whether this continues to be the case remains to be seen.

Auctions Surge Into Winter

According to CoreLogic RP Data, the preliminary auction clearance rate nudged higher over the first week of winter, however the number of auctions dipped compared with the previous week.  There were 1,953 auctions held over the week, down from 2,480 last week, however higher than one year ago when 1,201 auctions were held and auction volumes were low due to the Queen’s birthday public holiday in all cities with the exclusion of Perth. Preliminary results show that 70.4 per cent of capital city auctions held this week were successful, rising from a final result of 67.7 per cent last week. One year ago, across the lower number of auctions, 78.5 per cent sold. Melbourne and Sydney, the two largest auction markets have maintained strength this week, while across the remaining, significantly smaller auction markets, results have been more varied.

20160606 Capital city

Home Prices Higher In May

The latest home price data from CoreLogic RP Data shows that dwelling values across the combined capital cities of Australia rose by 1.6% in May with house values driving most of the capital gains, up 1.8% compared with a 0.1% rise in unit values. The strong May numbers were largely the result of a surge in Sydney dwelling values which were up 3.1% over the month. A rise of more than 1% month-on-month was also recorded in Melbourne (1.6%), Canberra (2.5%) and Hobart (2.2%). Perth was the only city to record a fall in dwelling values over the month, down 2.7%.

CoreLogic-May-2016The CoreLogic combined capitals index has recorded a 5.0% increase since the beginning of January and as a result, has caused the annual trend in capital gains to rebound after conditions tapered since July last year. The annual rate of growth, which recorded a recent trough in December last year at 7.4%, has since rebounded back to 10.0% at the end of May.

After such a strong performance across the Sydney housing market, the annual rate of growth has moved substantially higher to reach 13.1% per annum after reaching a recent low point of 7.4% per annum growth over the 12 months ending March 2016. Despite Sydney’s bounce in the trend rate of growth, Melbourne’s housing market is still recording the highest annual rate of capital gain at 13.9%.

Perth and Darwin remain the only markets to record an annual decline in home values. Perth dwelling values are down 4.2% over the past year and have recorded a peak to current fall of 6.7%. Similarly, Darwin dwelling values fell by 3.5% over the past year and are down 5.5% since peaking two years ago.

The current growth cycle has been running for four years now. After capital city dwelling values fell by 7.4% between October 2010 and May 2012, values have since risen by 36.6% over the growth cycle to date. The largest capital gains over the cycle to date have been in Sydney where dwelling values are 57.5% higher followed by Melbourne with a 39.4% capital gain since values started rising. The third strongest performance has been in Brisbane at 18.5%. The rebound in the rate of capital gain during 2016 is supported by other measurements in the market. Auction clearance rates across the combined capital cities have remained stable and hovered around the high 60% to low 70% range since February this year. Sydney clearance rates remain firm, sitting at around the mid 70% mark over the past three weeks while Melbourne clearance rates now sit in the early 70% range.

Sydney Auctions Still Hot

According to CoreLogic RP Data, this week 2,419 auctions were held across the combined capital cities, representing a substantial 26 per cent rise in auction activity compared to the previous week when 1,920 capital city auctions were held. This was the fourth highest number of weekly auctions held over the year to date.  The rise in activity was coupled with a slight fall in preliminary combined capitals clearance rate, from 68.9 per cent last week, to 68.0 per cent this week. Much of the strength in the combined capitals clearance rate can be attributed to the two largest auction markets (Melbourne and Sydney), where clearance rates remained the strongest nationally. One year ago, however, both Sydney and Melbourne recorded a clearance rate in excess of 80 per cent, and the combined capital city clearance rate was 78.5 per cent across 2,792 auctions.

20160530 Capital city

Rentals Take A Dive

From CoreLogic RP Data.

With combined capital city weekly rents falling by -0.2% over the past year, we take a look at the capital city suburbs that have recorded the largest falls in weekly advertised rents over the past year.

The CoreLogic Monthly Rental Report for April 2016 showed that weekly rents have fallen by -0.5% for capital city houses over the past year and unit rents have increased by a record-low 1.2%. Substantial new housing supply, slowing population growth, weak wages growth and recently heightened level of purchasing by investors are all contributing to falls in rents. There is also currently a record high number of new units under construction, the last Census (2011) showed that units are more than twice as likely to be rented than houses. Given this, much of the new housing supply under construction is ultimately likely to end up as rental accommodation.

Annual change in weekly rents across the combined capital cities, houses vs. units

While for an investor falling rents are not ideal, particularly given home value growth is generally slowing, for renters it is great news because it means they can potentially reduce their housing costs or find superior accommodation for a similar cost.

With rental rates marginally lower over the past year across the combined capital cities, there are significant differences across individual suburbs. There are now many capital city suburbs where advertised rental rates are lower than they were 12 months ago and the table included in this report shows the 5 suburbs in each capital city that have seen the largest falls in the median advertised rental rate over the year.

Top 5 capital city suburbs for rental rate falls, 12 months to April 2016


For houses it is noticeable that some premium suburbs have seen the largest falls in advertised rental rates over the past year. Whether this is due to fewer executive rents as population growth slows or previous renters taking advantage of record-low interest rates to borrow to purchase is unknown. What is clear is that demand for rental houses is easing and in a number of suburbs rental prices have fallen dramatically.

A number of premium inner-city locations have made the list for units after seeing the median of advertised rental rates fall, in some cases dramatically over the past year. While the suburbs listed are often not the most significantly supplied rental markets, there are signs of weakening growth in many price inner-city unit markets.

With more rental supply set to enter the market over the coming years we expect that in order to keep tenants, landlords may have to reduce their rents. Although the cost of purchasing a house is becoming increasingly unaffordable it seems that the cost of renting is set to become more affordable over the coming years.

Property Demand Confirmed By Auction Clearance Rates

According to CoreLogic RP Data, the preliminary clearance rate across the combined capital cities rose this week, up from 69.5 per cent the previous week to 70.0 per cent. The level of activity across the capital city auction market was similar to the previous week, with 1,863 auctions held this week, compared to 1,876 last week. Auction activity remains well below the comparable week last year, however, when 2,599 capital city auctions were held and 79.1 per cent cleared. After ANZAC weekend last year, there were five consecutive weeks of more than 2,200 auctions held across the combined capitals; however the same activity hasn’t been replicated this year.

20160523 capital city

Record high unit construction increases settlement risk

According to CoreLogic RP Data, the recent boom in unit construction has seen record-high levels of unit approvals and construction culminating in a substantial volume of new unit stock, much of which will settle over the next 24 months.

CoreLogic’s new settlement risk report looks at the number of units due to settle over the next 6, 12, 18 and 24 months. This is based on the expected completion of new developments coupled with the number of units being built in these developments.

The first table highlights the number of unit sales over the 12 months to April 2016, the average number of annual unit sales over the five years to April 2016 and the anticipated number of unit completions over the 12 month to April 2017 and 24 months to April 2018. Across the combined capital cities there are 92,102 new units set for completion over the next 12 months with that figure rising to 231,129 over the next 24 months.

Number of expected unit settlement, data to April


Looking at the expected new unit supply, Sydney and Melbourne predictably have the greatest increases in stock over the next two years. If you compare the volume of stock expected to settle over the next 12 and 24 months to the average number of unit sales annually over the past five years, you can see a big disconnect, particularly in the four largest capital cities. The historic sales figures include sales of both existing and new units keeping in mind that new stock, usually accounts for a smaller slice of total sales than resales of existing stock.

The large volume of new stock, coupled with an ever-growing supply of existing stock which resells means that historic high levels of unit settlements are due to occur over the next two years in most cities. In fact, in Melbourne and Brisbane even a recurrence of the peak year for sales over the next two years wouldn’t represent enough demand to cater for all of the new units set to settle over the coming 24 months.

The second table highlights the SA3 regions nationally that have the highest number of anticipated unit settlements over the next 24 months. Given the much higher number of unit settlements in Sydney and Melbourne, these cities dominate this list with eight and 12 of the regions listed respectively. In Queensland, three regions from Brisbane and one from the Gold Coast are listed while one Perth region is also listed.

SA3 regions nationally with the most expected unit completions over
24 months to Apr-18


If we compare the capital cities, it becomes evident that most of the stock in Melbourne, Brisbane and Perth is located in inner-city (within 10km radius of the city). Taking a look at Sydney, the new unit supply is more geographically diverse. Yes, there are a lot of new units in inner city areas but there are also plenty in outer areas like Parramatta, Strathfield, Auburn and Kogarah-Rockdale. In some respects this spreads some of the risk around the city rather than other cities where new supply is much more centralised.

The large volume of new unit settlements over the next two years does raise some potential concerns, namely:

  • In many regions, capital growth for units has been substantially lower than that for houses. Many off-the-plan unit buyers would have expected a level of capital growth between contract and settlement.
  • Mortgage lenders have recently tightened their lending criteria and subsequently some people who have committed to purchasing off-the-plan units may not be able to borrow as much as they could at the time of signing the contract.
  • Units are much more likely to be owned by investors. Not only have lenders recently tightened mortgage criteria, they have also increased mortgage rates for investors.
  • Many of the units are coming up for settlement in similar locations and will compete with existing unit stock. With so much stock coming on-line at once there is an increasing concern as to whether settlement valuations will actually meet the contract price of these units.
  • To compound the situation, three of the four largest banks have announced they will no longer be lending to home buyers from overseas which could result in a larger number of contracts not progressing through to settlement, considering a larger proportion of off-the-plan unit sales are to overseas buyers.