Competition Heats Up for Affordable Sydney Property

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Demand for homes in Sydney’s more affordable price brackets is ramping up, as both first-home buyers and mortgage downsizers compete for similar properties.

This market shift is expected to gather pace as the property scene hots up during the course of 2024. [1]

Brendan Coates, the economic policy program director at the Grattan Institute, says this situation will continue until Australia can find a way of building far more new homes, and ones that people can afford to buy.

“At the heart of the problem is the fact we just haven’t built enough homes to meet the needs of a growing population,” he said.

“Especially homes in places where people most want to live – that is, in established suburbs close to jobs, transport, schools, and other amenities.” [2]

What forces are shaping the market?

The movement towards mortgage downsizing began about eight months ago and is expected to continue until a significant decrease in Australia’s official cash rate occurs.

Thomas McGlynn, chief executive of real estate agency BresicWhitney, has seen a spike in the number of people choosing to downsize, spurred on by financial pressures and the uncertainty surrounding interest rates. [3]

This trend, he says, is exacerbated by the rising cost of living in Australia and the aftermath of previous rate hikes, forcing some overcommitted homeowners to sell their properties to alleviate debt.

Those who purchased homes at peak market prices are now eager to reduce their financial obligations, while others are selling to improve their cash flow and to take advantage of buoyant property prices..

The latest CoreLogic Housing Value Index indicates a notable upward trend in the housing market. The index shows a 1.6% price rise in the March 2024 quarter, adding around $12,000 to the cost of a home in Australia. [4]

This data underscores the ongoing demand for housing in Sydney, where prices continue to climb, further highlighting the need for affordable housing solutions – a challenge being addressed by the state government.

Demand for affordable property is hot

Data from CoreLogic has indicated a rising demand for affordable homes since mid-2023, with the growth in this segment picking up pace.

This surge is reflected in the increasing value of lower-priced homes, a consistent trend across major Australian cities – this sector recorded a 3.1% price increase in the March 2024 quarter.

The push for more economical living and tighter borrowing constraints has simply made affordable properties more attractive to buyers

Tim Lawless, research director at CoreLogic, says that the affordable housing segment in all capital cities has been performing strongly over the past 12 months – trend he expects to continue. [5]

“If interest rates stay higher for longer, that probably provides further incentive for people to reduce their debts, which means there’s going to be even more competition for those lower priced properties,” he said.

“Anecdotally at least, [we know] people are looking to reduce their debt, and maybe take advantage of strong capital gains and cash out, downsize or move to a cheaper location where they can reduce their leverage.”

Challenges for first-home buyers

With the rise of cashed-up buyers and downsizers hunting for lower-priced property, the value of affordable housing is experiencing upwards pressure. As a result, first-home buyers now face increased competition.

The concerning trend could ultimately price first-home buyers out the market, limiting their options and forcing them to either rent for longer or move to less desirable locations.

A recent report by Domain found that it now takes young Sydneysiders around six years to save the 20% deposit needed if the purchaser wants to avoid having to buy lenders mortgage insurance.

In addition to the struggle to save for a deposit many first-home buyers are worried that they will struggle to service a large mortgage during a period of historically high interest rates.

Domain’s chief of economics and research Dr Nicola Powell says that on average first home buyers are spending around 46.5% of their incomes on servicing a mortgage for a house in the city.

“Mortgage affordability has really blown out, so it takes a larger proportion of your income to make those repayments,” she said. “The other flip side is a higher cash rate means you get greater interest accrued on savings, so savings rates are better.” [6]

What is going to happen next?

Despite the robust performance of the affordable housing market in Australia, ongoing price increases pose a threat to its very sustainability. If this trend persists, it could push demand towards mid-priced properties, making it even more difficult for new entrants.

Experts suggest that future interest rate movements, determined by the Reserve Bank of Australia [RBA], will play a critical role in determining the market’s direction with affordability a key factor in buyer decisions.

Arjun Paliwal, head of research at buyer’s agency InvestorKit, says property prices in Sydney could stabilise if the RBA cuts interest rates later in 2024, a move that is now seen as increasingly unlikely.

“We expect the affordable end to remain strong for the rest of this year, but if values continue to rise at these rates, that segment will lose its affordability advantage,” he said. [7]

Young buyers are benefiting from stronger wage growth over recent years, but many remain dependent on financial assistance from their families or the hope of accessing government housing schemes.

PRD chief economist Dr Diaswati Mardiasmo says the selection criteria for these Help to Buy schemes should be widened as a matter of urgency to help more first-home buyers enter an increasingly competitive market.

“[Many first-home buyers] are stuck in a weird limbo,” she said. “They’re too rich for the government programs, but not rich enough to pay a 20 per cent deposit and so avoid paying lenders mortgage insurance.” [8]

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[1] The Australian Financial Review

[2] Grattan Institute

[3] The Australian Financial Review

[4] CoreLogic

[5] The Australian Financial Review

[6] Channel Nine

[7] The Australian Financial Review

[8] The Sydney Morning Herald



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