• New South Wales update

Quarter 1 of 2016 saw Sydney house prices grow by 2.3 per cent, exceeded only by Melbourne’s 2.5 per cent growth rate.

Sydney’s median house price as of March was $805,000, having risen by 1.7 per cent, while the median apartment price was $645,000 with a slower growth rate of 0.9 per cent. The average listing time to sell houses is 31 days and for apartments, 28 days.

While the futures market was affected by speculation of a further 25 basis point cut by mid-2016, the RBA cash rate remained stable at 2.00 per cent. Commentators have noted that the market appears close to equilibrium.

Sydney’s auction clearance rates have fallen from 84.4 per cent in March last year to 72.7 per cent in March 2016. The demand from owner occupiers grew by 20 per cent while investor demand fell by 10 per cent. Overall, the market appears to be easing into owner occupier’s territory.

In the commercial office market, Sydney’s average rent for grade A office space has risen 4 per cent to approximately $530 per square meter per annum in the past quarter, which is up 15.7 per cent from the prior year.

NSW council mergers

The NSW government continued with its strategy of reducing the number of councils in NSW. In May, the government published a list of definite mergers with a number of councils still contesting the decision using legal avenues. Administrators were appointed after 400 councillors from more than 40 councils were sacked. The administrators are to run 19 new councils until the next local government elections in September 2017. The impact of the initial handover is yet to be seen. Currently administrators are making representations that development applications will be assessed with the same rigour and under the same development controls that existed previously. The mergers are expected to cost the government up to $500 million, but will hopefully reduce red tape and duplication to the effect of close to $20 billion over 20 years. This will allow councils to fund better services and infrastructure for communities or lower council rates. We do not expect any significant changes in council services will be seen until after the 2017 council elections.

The merger process is also expected to create new investment opportunities in properties made redundant through duplication. Historic council chambers, council land and other properties are expected to be put out to tender, and developers are already making preparations to purchase these valuable assets.

NSW budget update

The headline from the recently announced NSW State Budget was a $3.4 billion surplus in 2015/16 followed by a $3.6 billion surplus for 2016/17. New South Wales has benefited significantly from a hot property market and property taxes and proceeds from the asset recycling program.

Treasurer Gladys Berejiklian will set aside a $73.3 billion infrastructure fund for spending on roads and rail and a record spend on health and education.

It must be noted that NSW will lose a significant amount of Commonwealth funding through a reduction in GST payments. Forecasts show a $10.8 billion knock to revenue by 2019-20. To counteract this, the government is looking to increase revenue from other sources, such as higher stamp duty for foreign property buyers. This is likely to be the first of a number of revenue-raising measures.

Stamp duty changes

There is concern from some sectors as to the potential impact of any change to stamp duty. Under new measures introduced in the most recent budget, foreign investors will be hit with a 4 per cent stamp duty surcharge on the purchase of homes or apartments. This is expected to raise over $1 billion over four years. Overseas investors will also pay an extra 0.75 per cent land tax surcharge on residential real estate. The stamp duty surcharge came into effect 21 June 2016 while the land tax surcharge will commence in the 2017 land tax year. This is similar to the Victorian model , where an initial 3 per cent surcharge has since been raised to 7 per cent. Victoria also has a 1.5 per cent land tax surcharge for foreign investors applicable to some properties, with plans to increase it to 3 per cent.

Much uncertainty surrounds the potential impact of the surcharge in NSW. The Property Council is concerned it will reduce housing demand and increase property prices, which in turn will subdue other economic activity in, for example, the construction and rental markets.

However, according to the NSW Treasurer, the Victorian model has shown that the surcharge has had no adverse impact on the property market.

The higher end of the foreign buyer market is expected to remain undeterred as this level of investor are used to paying a premium for world-class assets. Moreover, the disadvantages of the increased surcharge do not outweigh the advantages that having a foothold in the Australian market yields. The surcharge will bring Australia into line with other cities with a large high-end foreign buyer market like New York and London. In terms of the lower end of the market, a slight dip in short term-demand may be felt. However, this will be offset by increased demand from an expected one million people forecast to settle in Sydney over the next ten years.

Next article: Victoria state budget... the aftermath.