Home rebuilds unscathed by broader decline in Sydney

Speaking to Mortgage Business, Luke Fryer, general manager of Metricon NSW, said the use of home equity to fund rebuilds in Sydney has “flatlined”, rather than declined, against the backdrop of Australia’s housing slump, which saw house prices plummet by more than 14 per cent in Sydney when compared to the mid-2017 peak.

Mr Fryer’s view is based on Metricon NSW’s analysis of its own customer data. For example, the national home builder found that 79 per cent of its customers in the greater Sydney region would rather knock down and rebuild their homes than renovate or sell.

“We haven’t seen the significant drop developers have seen, with new land sales dropping by up to 60 per cent in some cases,” the Metricon NSW general manager told Mortgage Business.

“The fact that we’ve seen no decline [is] quite extraordinary, considering the environment we’ve had over the last 12 months.”

Indeed, non-bank lender Chifley Securities last month reported a 16 per cent rise in property developers seeking urgent financial help as their project sales and pre-sales have waned, due in part to “tighter lending controls”.

“The tighter lending controls imposed by the major banks are squeezing both buyers and developers, with the result being unfinished projects, which will exacerbate the increasing shortage of housing as the population in the eastern states continues to grow,” Dominic Lambrinos, principal at Chifley Securities, said in May.

Mr Fryer attributed the demolish-rebuild trend to Sydney home owners’ equity position being “pretty strong” due to the significant run-up of house prices over the last decade.

“We’ve got low unemployment [in Sydney], household incomes are healthy, and home owners often lived in the residence for five, 10, 20 years so their equity position is pretty strong, which means that the cyclical market downturns have a low impact on them,” he said.

“For example, they could have bought the property for $600,000 back in 2004 and it’s now worth $1.4 million, so they can actually rebuild the property by utilising the equity without having to pay anything from their pockets. So, they improve their lifestyle, while improving the value of the property from, say, $1.4 million to $1.9 million.”

The prominence of the trend in the Canterbury-Bankstown region of Sydney was attributed to the “urbanisation effect that happened in the last 10 years”.

“Traditionally knockdown-rebuilds were almost exclusive to the eastern suburbs, upper north shore, and northern beaches where property values could support [the cost of] rebuilding,” Mr Fryer said.

“But over the last 10 years, [the region] has experienced enormous price growth to the point where borrowers have significant equity, which opens up the choice of knocking down and rebuilding.”

It’s not entirely clear whether recent political, economic and regulatory developments has played a part in driving Sydney-based home owners to demolish and rebuild, rather then renovate and sell. But Mr Fryer believes that the trend probably indicates that Sydney home owners are content with the location in which they live but want to upgrade their lifestyle.

He did, however, acknowledge that the “tough market” may have made the option to rebuild more compelling, especially for families, but even for property investors looking to maximise the potential of blocks of land they purchased.

“Auction clearance rates have increased post-election significantly, but before then, listings were going down because people thought, ‘This is a tough market’, ‘This isn’t a good time to sell’, ‘I don’t know where the buyer’s market’, ‘Maybe it’s not a good time to buy a new home’,” the Metricon NSW general manager said.

“A customer [that rebuilds] is doing neither. They’re not buying and they’re not selling; they’re improving their asset.”

Mr Fryer also expects the Coalition’s First Home Deposit Scheme to have a positive impact on demand. The scheme, which is to come into effect on 1 January 2020, will allow first home buyers earning up to $125,000 annually, or $200,000 for couples, and who have been able to save a deposit of at least 5 per cent, to use a government guarantee to borrow additional funds to meet the 20 per cent deposit requirement.

“First home buyers are not as likely to to knock down and rebuild homes, but there is going to be an increase in demand for property and we will return to a vibrant real estate market, which means prices will probably go up,” he concluded.

[Related: Home price slide slowing in most expensive locations]