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It's the crunch question that's baffling real estate agents. Will the buoyant Sydney and Melbourne housing markets experience higher volumes of mid- and premium-priced properties? Or is listing activity destined to decline?
After four high-performance years of house price growth in both capitals, they are considered true global cities. According to Knight Frank's annual The Wealth Report, Sydney and Melbourne are the top two destinations in the world attracting high net worth individuals from overseas, dwarfing the inflow of competitor cities such as Vancouver and San Francisco.
Australia's two largest cities have a broad, cross-border appeal that has helped underpin strong international and interstate immigration to both over the past five years, leading to higher property prices.
Soaring land values have fuelled the trend and have prompted home owners to spend more on building improvements and renovations.
This trend shows no sign of abating anytime soon.
The Housing Industry Association forecasts that more than $35 billion will be spent on renovations in Australia in 2019. This is an increase of $2 billion on the figure spent on renovations in 2016.
For agents, rising property values in a low-interest rate environment is a double-edged sword.
On one hand, agents are able to reap larger commissions because properties are substantially more expensive than they were five years ago. But, on the other hand, the cheap cost of borrowing money and higher property values are pushing people to renovate an existing home rather than buy something new.
LJ Hooker's Bill Malouf says the lack of stock on the market is leading to dangerous tactics by some agents in order to win business.
"I think the last 12 months, especially 2016 and now 2017, in the eastern suburbs has shown us that, I think the stock levels are down by 40 per cent. Now that is a very big figure but that seems to be correct," he said.
"All the agents are desperately looking for stock. They're being very, very competitive about what they are prepared to do to get that stock and what really worries me is I think there is, to a certain extent, a lot of overquoting going on, in regards to expectations."
In Melbourne, Jellis Craig's Geordie Dixion says lower stock levels are due to upcoming school holidays and ANZAC public holiday, but overall, this year's listings have fallen in the normal range.
"If we looked at our February, for example, we were pretty much almost on par from this year to last year's volume numbers," she said.
"In regards to May and June, if you look at them collectively there is seven great auction days available for clients to consider.
"We do feel it is going to bounce back and we are listing strongly for May, so I do feel once we get through the Easter period, buyers will see the volume come back and the opportunity to look at homes.
Domain Group chief economist Andrew Wilson says land values are escalating at a significant rate in a low-inflation environment.
He notes the combination of these factors is keeping building costs at reasonably stable levels, which is encouraging consumers to renovate or to knock down and rebuild.
"The differential between the cost of building and the cost of land is widening," Dr Wilson says. "The land is becoming the real significant element of your total property holding because building costs are becoming less and less significant.
"You are unlikely to over-capitalise by renovating or extending because building as a factor of the total cost of property is declining as a proportion."
Dr Wilson says the surging value of land is creating optimum conditions in Melbourne and Sydney for relatively new homes to be knocked over and replaced with a fresh building.
"You are seeing mega mansions that are not that old and which have swimming pools and tennis courts, being sold - and the new owner knocks them over," he says.
Mr Malouf agrees, saying the trend of homeowners renovating rather than selling to move up a price bracket is affecting current stock levels.
"There's a certain amount of people who have traded in the last three years; they are all comfortable, they are in or they are renovating," he said.
"You've also got the other aspect that the market has moved so strongly in the last two to three years that people are saying, 'oh I can't afford to go to the next stage so what I am doing is renovating what we've got."
In Melbourne, Ms Dixon says half of the buyers she sells to are looking for a renovation project while the other half are looking for established homes to move straight in.
With Alexandra Spangaro
