3 reasons why property sales volumes are declining: Pete Wargent

Property transaction volumes are reportedly declining in Sydney, and nationally.

There are about 9.75 million residential dwellings in Australia, but despite a record construction boom stock turnover has fallen to well below 3 per cent, and way below the historical averages.

There could be any number of reasons for this.

Like a property market Jim Bergerac, I took a look through this month's housing finance data angling for clues.

 

 

We know that the ridiculous cost of stamp duty (and selling fees) is a discouraging factor for people wanting to move house in Sydney, the only real question is how much of a factor it actually is.

Sure, stamp has been around forever, but the bands were designed with old dwelling prices in mind, and only recently have duties become farcically high.

 

Stamp duty receipts in New South Wales have more than doubled since June 2013 to $8.63 billion. 

 

In June 2013 the buyer of a median priced house in Sydney paid about $27,000 in stamp duty, mortgage fees, and transfer duties. Today, they'll pay nearly $45,000.

 

That's a lot of capital growth required to justify the costs of moving house, so we'll arguably see a shift towards renovating and staying put (or buying cheap and renovating) just as we did at Sydney's previous cyclical peak in early 2004.

 

In fact, that's already happened to some extent in Sydney, while renovations activity is rising steadily in Melbourne and Brisbane.

People will campaign for higher or different types of property taxes, but it's hard to see it happening in NSW while this unprecedented windfall is enriching the state government.

The state's finances are in enormous nick - debt free and racking up big surpluses!

 

 

A structural change over the medium term has been the "asset lock in" associated with property investors, with the prevailing tax legislation more or less compelling investors to use interest only loans and play a longer term capital growth strategy.

 

 

 

Again, investors have been around forever, of course, but since the latest round of monetary easing from 2012 this cohort has become a more substantial force in the larger capitals. 

 

The recent reclassifications of the stock of outstanding credit from investors to owner-occupiers are all too convenient to be taken seriously.

In any case, there has still been a 300 per cent increase in outstanding investor credit since 2003. Buy, hold, and compound the capital gains.

 

What of the residential construction boom?

In Australia non-residents are generally restricted to the purchase of new dwellings, thereby encouraging new construction, and this is clearly working now interest rates have been dropped.

 

The housing finance figures show that domestic owner-occupiers accounted for only 31,500 or so financed purchases of new dwellings over the year to September 2016. 

The numbers are up in the most of the larger capital cities, but not that much in the context of a record residential construction boom.

 

So, who is buying the new stock? Downsizing cash buyers would account for a proportion of new dwelling sales, super funds, and investors sold new stock by 'white knight' middlemen or advisors some more. 

 

But a huge share would be non-resident buyers, particularly now from China.

This is also a new trend - FIRB approvals have tripled in only two years!

 

The Chinese phenomenon in Australian property in particular is a relatively recent one, so nobody can say for certain what trends will play out, but intuitively it wouldn't be a surprise if most non-resident buyers are in for the long haul.

 

Arguably a fair proportion of dwellings bought by non-residents don't even make it to the rental market, let alone become resales. 

 

 

Unfortunately - unlike in Bergerac where the culprit was invariably either one of lovable rogue Charlie Hungerford's mates or someone related to the glamorous jewel thief - there is no singular  explanation for why transaction levels are down.

 

High transaction costs represent one valid argument. 

 

Perhaps most people wanting to move house in this cycle have already done so, and the line of willing sellers is becoming exhausted. 

 

Other prospective vendors may fear that if they sell they might never get into the market as prices levitate away from them, for despite a thousand warnings prices are again forecast to rise strongly in Sydney, Melbourne, and Brisbane in 2017 (and with listings down, there are fewer homes to pick from). 

 

Certainly with so much hype around, lots of vendors may just decide that the easiest option is to do nothing.

 

And finally, arguably a higher proportion of owners and investors are simply using real estate as a long term inflation hedge, due to rising land prices.