Why are property sales volumes declining?

Why are property sales volumes declining?

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. Auction results are telling us this.

There could be any number of reasons for this…

Staying put!

We know that the ridiculous cost of stamp duty (and selling fees) is a discouraging factor for people wanting to move house in Sydney. 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.

A buy & hold strategy

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.  Since the latest round of monetary easing from 2012 investors have become a more substantial force in the larger capitals. There has been a 300 per cent increase in outstanding investor credit since 2003. Buy, hold, and compound the capital gains.

Offshore investors

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. This however will slow as stronger FIRB requirements come into play.

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 with prices still rising in Sydney, Melbourne, and Brisbane. When listings are 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. Arguably a higher proportion of owners and investors are simply using real estate as a long term inflation hedge, due to rising land prices.

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