Welcome to this week’s edition of the Property Edge Newsletter, your go-to source for the latest insights and trends in the Australian property market. This week, we look at a spike in distressed listings due to rising financial pressures, a change in construction costs, and renewed interest from foreign buyers in Australian real estate.

A Rise In Distressed Property Listings: Why More Homeowners are Selling Properties Now

The property market is feeling the pressure from 13 consecutive interest rate hikes, leading to an increase in distressed property listings in New South Wales and Victoria. Data from SQM Research reveals a 16.3% rise in distressed listings in NSW and a 15.6% increase in Victoria as of June, compared to the previous year.

Distressed listings, characterised by terms such as “urgent sale” or “price reduced,” have surged in these states, in contrast to the stronger property markets in Queensland, Western Australia, and South Australia, where distressed listings have decreased.

Distressed Property Listings

While rising mortgage repayments and living costs have strained homeowners, SQM Research’s managing director, Louis Christopher, notes that the current volume of distressed sellers has not yet returned to pre-pandemic levels. He acknowledges that homeowners are experiencing significant stress due to high interest rates and increased living costs, but many are managing by reducing discretionary spending, maintaining employment, or receiving pay rises.

Christopher predicts a substantial rise in distressed listings only if the unemployment rate exceeds 6% and remains there. This sentiment is echoed as new property listings have risen by 6.7% in Sydney and 9.8% in Melbourne compared to last year, driven by uncertainty over future interest rates and economic conditions.

Gareth Aird, Commonwealth Bank’s head of Australian economics, observes that prolonged high interest rates have made it increasingly difficult for households to meet mortgage repayments, leading to a gradual increase in mortgage arrears. However, homeowners are striving to avoid selling due to the high costs associated with re-entering the market, such as stamp duty. Many are cutting back on expenses, seeking additional work, or having a second household member join the labour force.

Impact on Buyers

The increase in properties for sale provides more choices for buyers, although it is not expected to drive prices down significantly. The market might return to more typical levels of inventory after years of limited availability, benefiting buyers.

Coping Strategies

Households are employing various strategies to avoid selling, such as renting out rooms or properties, moving in with parents, or refinancing their debts. RateCity research director, Sally Tindall, highlights that while distressed selling is rising, it remains below the levels seen in 2019. Borrowers are making significant efforts to keep up with mortgage repayments, even as interest rates climb.

Future Outlook

Despite upcoming tax cuts and energy bill rebates, high interest rates are expected to persist for the better part of the next year, with potential for one or two more hikes before any reductions. Tindall advises homeowners to remain cautious and not rely on full rate relief in their financial planning.

This Type of Property Is Twice as Profitable

Recent data highlights a significant disparity in profits between house and unit sales. House sellers are achieving more than double the profits compared to unit sellers, driven by a surge in house prices relative to higher-density homes.

In the March quarter, homeowners who sold their properties made a median paper profit of 388,500 for houses across capital cities, while unit vendors saw a median profit of 165,000, according to figures from CoreLogic.

The profit gap was most pronounced in Sydney, where house sellers enjoyed a 600,000 profit compared to 200,000 for unit sellers. Similar gaps were observed in Melbourne (405,000 for houses vs. 145,750 for units), the ACT (435,000 for houses vs. 159,000 for units), Brisbane (400,000 for houses vs. 171,000 for units), and Perth (260,000 for houses vs. 105,000 for units).

Profit Comparison Table

Houses were more likely to generate profits, with 97.1% of house resales making a profit in the March quarter, compared to 89% of units. CoreLogic’s head of Australian research, Eliza Owen, noted that house prices have risen faster than apartment prices over the past decade, increasing by 84.9% compared to 41.1% for units.

Houses attract a premium due to their larger land component and development opportunities, while the surplus of unit stock from an investor-fuelled boom in the 2010s has slowed capital gains for units. Additionally, the pandemic accelerated house value growth as buyers sought more living space, moving to outer suburbs and regional areas where detached houses are more common.

Owen pointed out that the higher profits for houses underscore the growing inequality in the housing market, not just between homeowners and renters, but also between those who can afford detached houses and those restricted to units. She highlighted the need to consider this disparity when planning the future of urban development.

Government initiatives to promote development in transport-rich areas aim to increase home ownership but may result in substantial windfall gains for house sellers, contrasting with the modest capital gains for unit buyers. PRD Real Estate chief economist Dr. Diaswati Mardiasmo agreed, noting that the supply of new detached houses is minimal compared to new units, and established houses for sale are scarce relative to demand.

Mardiasmo added that while some small families might choose a three-bedroom unit, most units on the market have two bedrooms, which may not be suitable for families, especially those wanting a pet or backyard.

Buyer’s advocate Jarrod McCabe emphasised the differences between high-rise apartment towers and older boutique blocks. He recommended that unit buyers looking to build equity focus on higher value areas and properties with a substantial land component, such as small blocks in quiet streets with good access to public transport and shops.

Australia’s Soaring Construction Costs Final Start to Plateau

Residential construction costs in Australia might finally be stabilising, according to the latest data from CoreLogic’s Cordell Construction Cost Index. The second quarter of 2024 saw residential building costs rise by only 0.5%, following a 0.8% increase in the first quarter. This brings the total increase for the fiscal year 2024 to just 2.6%, marking the smallest annual rise in construction costs since March 2002.

Construction Cost Trends

Tim Lawless, research director at CoreLogic, noted that construction costs have “finally returned within normal margins.” However, he cautioned that building or renovating remains almost 30% more expensive now than it was pre-pandemic, after a prolonged period of escalating costs.

Despite the elevated costs, the recent data offers some relief. Lawless expects the findings will gradually help repair builder profit margins and boost confidence in pricing for new builds and renovations. Nationally, the consumer price index (CPI) rose by 1% in the March quarter, surpassing the 0.8% rise in construction costs.

With construction costs rising less in the June quarter, Lawless predicts that this growth level will likely be well below the CPI when it is released later this month. Given that residential building costs are a key component of the housing CPI, the slowdown in construction costs is a positive development for inflationary pressures.

John Bennett, CoreLogic’s construction cost estimation manager, pointed out that recent price stability is due to reduced price volatility for materials. Categories such as timber and metal products, essential for framing, trusses, floors, cladding, and roofing in residential construction, have seen price reductions. However, other costs, like labour, remain elevated and continue to contribute significantly to residential project expenses.

The stability in construction costs is a welcome development for the industry, indicating a potential easing of the financial pressures that have burdened builders and renovators over the past few years. This trend, if sustained, could provide a more predictable and manageable environment for future residential projects.

Foreign Demand for Australian Properties Running Hot

Foreign buyers have shown increased interest in Australian real estate, making more purchases in the past financial year compared to 2021-2022, according to the latest data from the Australian Taxation Office (ATO). Over the last financial year, foreign buyers made 5,360 residential property purchases, spending a total of 4.9 billion.

Foreign Property Purchases

The majority of these buyers are from China, Hong Kong, and India. The value of transactions from these regions hit almost 5 billion in the past year. The average purchase price was 914,000, with China topping the list of foreign buyers, followed by Hong Kong, India, Vietnam, and Taiwan.

Eliza Owen, CoreLogic’s head of Australian research, pointed out that foreign buyers still make up only about 1% of all purchases in Australia, which were valued at over 407 billion in the last financial year. Despite this, foreign investment is often highlighted in discussions about housing affordability. Owen argues that banning foreign investment would not significantly impact affordability, noting that home prices fell by 2% nationally last year even as foreign investment increased.

Real estate agents report a sustained demand from foreign buyers, particularly for luxury properties. Michael Christie, CEO and co-founder of Christie & Co Property Group, mentioned that his firm recently sold a 4 million penthouse in Melbourne to a prominent buyer from Thailand. Christie sees continued strong demand from foreign buyers, not only for luxury apartments but also for established homes in inner suburban areas.

Leigh Kelepouris, a Ray White real estate agent, highlighted Melbourne’s south-east as a hotspot for overseas buyers, particularly from China, Hong Kong, and India. These buyers are attracted to Australia’s stable economy and political environment, often bringing significant cash resources to invest in property. Banks are also supporting these buyers, offering favourable loan terms with up to 50% loan-to-value ratios for those with overseas income.

The ongoing demand from international students and families moving to Australia is expected to continue driving the real estate market. Despite challenges in the development sector, including high construction costs and some developers facing financial difficulties, the overall outlook remains positive with a national shortage of property.

As we wrap up this edition of the Property Edge Newsletter, we hope you found our insights and analyses useful. The Australian property market continues to evolve, presenting both challenges and opportunities. Stay tuned for our next edition, where we’ll bring you more in-depth coverage of market trends, expert opinions, and practical advice to help you make informed property decisions. If you have any questions or topics you’d like us to cover, please reach out. Thank you for being a part of our community, and happy property hunting!

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