Expert commentary

Residential sector

The AFR reported that Sydney’s residential land prices increased 27.1% between July 2020 and June 2021, with further increases expected in the next two years. As the most expensive capital city in the country, the median lot price rose to $546,000 – an 11% increase during the June quarter alone. Melbourne recorded the second most expensive land market, with the median price rising 12.7% to $355,000. Data from CoreLogic and HIA indicates that as demand for new houses will increase and scarce supply will inflate values by more than twice the cost of building materials. (Sydney land prices surge 27pc in a year, Nila Sweeney 27/10/21)
 
Domain recorded that Sydney house prices have also bolted ahead, increasing 30.4% over the 12 months to September. According to the AFR, this indicates the fastest annual gain on record, but the rate of growth is slowing as new listings outpace sales. During the September quarter, house prices across Sydney rose by 4.6%, well below the previous quarter of 8.2%. (Sydney house price growth finally eases as listings outpace sales, Nila Sweeney 28/10/21)
 
Melbourne house prices have also increased, inching above the million dollar mark to hit $1,037,923. Read more by Domain: Melbourne’s house and unit prices hit another record high but will they keep rising?
 
The AFR reported that the gap between Sydney apartment and house prices has widened to 59%, up from 54.2% in July. Analysis from CoreLogic has revealed that house price increases are more than double the apartment price increase of 11.6%. This is pushing out buyers looking to upsize and also makes the luxury apartment market more competitive. (Upgrading from unit to house has never been more expensive, Nila Sweeney 22/10/21)

Rental market
The Australian reported that pressures due to rising house prices are bleeding into the rental markets, with rents rising 8.9% in 12 months. According to CoreLogic, the reasons for this increase include a shortage of stock and high demand for houses, particularly in regional areas. However, with house rents rising at more than double the pace of apartments, affordability may suffer, and people could return to higher density living. (Rents surge as housing boom spills over, Mackenzie Scott 27/10/21)
 
CoreLogic’s Rental Review data is explained by The Real Estate Conversation: Australian rents increase at fastest annual rate since 2008.
 
The Rental Review indicated that apartments in Noosa Heads and Sunshine Beach are the fastest-growing rental markets in the country. According to the AFR, tenant demand for homes in lifestyle locations has increased as previously historically low levels of investor activity had fuelled the strong rental growth. (Strong demand and low supply fuel rent rises of up to 40pc, Nila Sweeney 27/10/21)
 
Domain’s Rent Report revealed that due to significant house price growth yields have dropped in most, but not all, Australian capital cities. Covid affected markets in Sydney and Melbourne suffered, with yields dropping to 2.72% and 3% for the September quarter respectively. Read more: House rental yields fall as property prices soar across the country.
 
BTR
The AFR reported that developers are kickstarting build-to-rent projects across inner-city Melbourne. Samma Property Group plans to deliver four BTR projects comprising of 1412 apartments in the short-term, and is aiming to double the apartments across 11 projects by 2028, in a portfolio worth $1.7b. (Build-to-rent projects tagged for $750m impact fund, Nick Lenaghan 26/10/21)
 
Auction market
The nation’s capital cities returned an auction clearance rate of 81% from 2,533 homes, down from 81.8% last week. CoreLogic examines the preliminary results: Second busiest week for auctions across the combined capital cities so far this year.
 
OTHER KEY HEADLINES

Commercial sector

Retail
The Urban Developer reported that the retail sector is leading the charge for industrial space, with online sales requiring ‘dark stores’ rather than brick and mortar shopfronts for brands and retailers. The retail sector accounted for 35% of national leasing transactions in Q3, with e-commerce spending reaching $51b in Australia in the last 12 months. Read more: Retail Leads Record Take-Up of Industrial Space.
 
Offices
The AFR reported that leasing incentives for major CBD markets are nearing their peak.  As the reopening of Melbourne and Sydney offices bolsters business confidence, it is expected that incentives will level off and the fall in net effective rents will finally bottom out. Over the past year, net effective rents for prime office space have fallen by nearly 9%, as incentives rose to almost 34%. With daily office occupancy as low as 4% in major capital cities, vaccination rates across Australia are expected to provide a backdrop of stability that will trigger more stable net effective rents in the coming quarters. (Reopening puts a floor under sagging office rents, Nick Lenaghan 24/10/21)
 
The Australian reported that office markets outside of capital city CBDs are experiencing strong sales and leasing activity, with SMEs showing a preference for non-CBD office space. Suburbs like Richmond and Carlton in Melbourne’s inner-city suburbs, and Western Sydney’s Parramatta, have all been marked as areas of expected office growth post-Covid. One office project 20km from Melbourne’s CBD saw 30% of strata offices sold within 2 weeks of the pre-launch campaign. However, the CBD markets are still expected to recover slowly. (Melbourne office leasing picks up outside of CBD, Mackenzie Scott 27/10/21)
 
The AFR reported that the rising vacancies in Australian CBDs provide landlords with a window to make environmental upgrades to their buildings which will make their assets more attractive in the run-up to 2030. According to JLL, corporates who are looking to reach net zero or carbon-neutral operations by 2030 are likely to lease spaces that contribute to their goals. As offices are vacant due to the pandemic, JLL recommends landlords make adjustments to fit NABERS 5.5 stars requirements to prepare for the future. (Pandemic vacancies give landlords window for green office upgrades, Michael Bleby 27/10/21)
 
Industrial
East coast industrial land values have skyrocketed by as much as 60% in 2021 after rising demand and growing allocations of institutional capital to logistics projects. JLL estimates that yields have compressed by 160-180 basis points. Read more by Commercial Real Estate: Industrial land values up 60 per cent in a year.

OTHER KEY HEADLINES
1. Developers push turbo button on industrial projects – AFR 27/10/21
2. Dexus wins buyers for $1.5b office portfolio – AFR 27/10/21
3. Car dealership sells on razor-thin 3.3pc yield – Commercial Real Estate 28/10/21
4. Increase in office leasing enquires as Sydney and Melbourne emerge from COVID lockdowns – Real Commercial 29/10/21
5. Rural price surge continues as demand outstrips supply – Commercial Real Estate 25/10/21

Construction & development

According to the ABS, the shortage of building materials has caused delays to home building across the country and added 4% to the cost of homebuilding in 2020-21. At the same time, the cost of residential land rose by 8.5%, adding to the problem of housing affordability. CoreLogic believes that HomeBuilder grants contributed to increasing demand, which had a flow on effect on demand for building materials. Read more by The Urban Developer…
 
The shortage of skilled tradesmen and disruption to the building industry has pushed Australia down on the Global Construction Index to number 15, behind Switzerland, the UK and the US. The Index considers the average salary, cost of living and safety of construction workers to determine the ranking of 125 countries. The Urban Developer explains: Labour Shortfalls Push Australia Down Global Construction Index.
 
Construction defects
The AFR reported that Victoria has extended its period to litigate against builders, consultants or building owners liable for cladding rectification costs. The Building Amendment (Registration and Other Matters) Act 2021 has extended the claim period to 15 years and gives a new deadline of December 2026 to start litigation. It is unclear how much of the $600m committed can be reclaimed from the industry. (Victoria gives itself more time to take cladding builders to court, Michael Bleby 26/10/21)
 
The AFR reported that NSW is also tackling cladding defects – it kicked off its $260m cladding rectification program this week by removing combustible panels in Sydney’s inner-city. The state aims to correct 274 buildings. However, unlike Victoria, the NSW government will not be funding the work itself. Instead, it will pay interest on the $950m worth of loans it estimates owners’ corporations will take out to fund the remediation. (NSW kicks off cladding remediation work, Michael Bleby 26/10/21)

OTHER KEY HEADLINES
1. Victoria Adds Three Years to Cladding Claim Period – The Urban Developer 27/10/21
2. Hadrian the construction robot to build eight houses in Western Australia – Global Construction Review 05/10/21
3. Building more houses quickly is harder than it looks. Australia hasn’t done it in decades – The Conversation 28/10/21
4. Straw left behind after harvest transformed into compostable, fire resistant building panels – ABC News 29/10/21
5. ‘Taking sustainability up a notch’: New developments to be rated on construction emissions – The Sydney Morning Herald 28/10/21

Finance sector

Lending standards
APRA’s new lending rules will likely reduce the maximum amount a typical borrower could borrow by 5%. As a result, buyers are rushing to purchase properties before new lending rules come in November. Read more by The New Daily: Property buyers rush to secure mortgages before lending changes.
 
The Age reported that with these new macroprudential limits on lending, households would need an annual income above $200,505 to purchase a house in Rouse Hill in Sydney’s outskirts. Similarly, to buy a house in Warrandyte in Melbourne borrowers would need an income above $202,574. Whist this may block some people entering the housing market, on the other hand it also meant home buyers might consider a home more within their budget, which could help cool the market overall. (Homebuyers to need $200,000 a year in many suburbs if debt limits come in, Jennifer Duke and Elizabeth Redman 23/10/21)
 
The Australian reported that industry experts believe the need for government-backed lending products will increase as house prices continue to soar and lending conditions tighten. Both SA and WA have government lenders whose priority is supporting low to middle-income earners to access loans they would otherwise be denied. SA’s HomeStart chair Jim Kouts believes other states should proceed with financing models to support residents into home ownership. (HomeStart chair Jim Kouts warns of greater need for government lending, Giuseppe Tauriello 24/10/21)
 
Interest rates
The Age reported that the RBA could be forced to lift the official interest rate after a surprise spike in inflation due to surging housing costs. The ABS recorded that consumer prices increased 0.8% in the September, up 3% over the year, and financial markets believe the RBA will have no choice but to increase interest rates at least twice by the end of 2022. (Chances of a post-election rate rise grow as inflation stirs, Jennifer Duke and Shane Wright 27/10/21)
 
Tax reform
According to the AFR, the NSW government has split with the position of the Federal government and proposed that curtailing capital gains tax breaks would reduce investor speculation and curb housing prices. The current 50% discount on capital gains causes significant purchases of investment homes rather than accommodation for owner-occupiers and first-home buyers. (NSW targets capital gains as property tax fight erupts, John Kehoe 23/10/21)
 
According to The Urban Developer, Victoria’s proposed Windfall Gains Tax could potentially change land prices across the state – any capital gains developers enjoy from rezoning will be taxed at 50%. Read more: Undersupply, Windfall Tax Cloud Melbourne Property Pipeline.

OTHER KEY HEADLINES
1. Rising bond yields and the end of the super cycle bull market in bonds – AMP Capital 26/10/21
2. Consumers brace for higher prices as inflation pressures grow – The Age 27/10/21
3. Delta to deliver a $20bn blow to the economy, says Treasury – The Australian 27/10/21
4. Inflation climbs on fuel and houses, pushing above the bottom of Reserve Bank target range – ABC News 27/10/21
5. NHFIC bonds snapped up by investors – AFR 27/10/21