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National dwelling values post first annual decline since 2012

Posted on 11 December 2018

Source: CoreLogic

The May CoreLogic home value index results out today confirm that national dwelling values dipped by 0.1% over the month, fuelled by weaker conditions in Melbourne and Sydney while regional dwelling values continued to tick higher.

Australian dwelling values slipped 0.1% lower in May, taking the annual change (-0.4%) into negative territory for the first time since October 2012. In a sign the housing market downturn is becoming more entrenched, May marked the eighth consecutive month-on-month fall since the national market peaked in September last year, taking the cumulative fall in dwelling values to 1.1% through to the end of May 2018.

Commenting on the May results, CoreLogic head of research Tim Lawless said, "The negative headline growth rate is a symptom of weakening housing conditions across the capital cities, led by Melbourne and Sydney where previously, capital gains were nation-leading. Sydney and Melbourne comprise approximately 60% of Australia's housing market by value, and 40% by number, so the performance of these two cities has a larger effect on the headline market performance."

In Sydney, the most expensive quarter of the market has seen dwelling values fall by 7.1% since peaking compared with a 1.4% fall across the least expensive quarter of the market and a 3.3% decline across the broad 'middle' of the market.

Unit markets have shown some resilience to falling values in Sydney and Melbourne With housing affordability remaining a challenge in the largest cities, Mr Lawless said demand is naturally transitioning to the medium and higher density sector, where the market entry point is typically more affordable and housing stock is often more strategically located along transport spines and close to major working nodes. He said, "This broader demand base has seen unit markets in Sydney and Melbourne outperforming the detached housing sector, despite the significant number of units that have been built over recent years."

"Most other cities, where affordability constraints aren't as pressing, continue to see house values outperform the unit sector," Mr Lawless said.

Regional markets are outperforming the capital cities, with CoreLogic indices revealing a wider performance gap forming between the capital city growth trends compared with the regional areas of Australia.

Across the top ten performing regional markets is a mix of satellite cities such as Geelong, Ballarat and Newcastle, as well as lifestyle markets such as the Sunshine Coast, Southern Highlands, Shoalhaven and Coffs Harbour. Regional housing trends are also now seeing less drag from the mining regions. Although the weakest performing areas are generally still linked to the mining and resources industry, the declining trend has eased or even levelled across many of these markets.

While dwelling values are trending lower, weekly rents are rising, albeit at a generally sluggish pace. Nationally, dwelling rents were 0.1% higher over the month and 1.9% higher over the past twelve months. Despite the slow pace of rental growth, most capital city markets are seeing rents rise faster than dwelling values which is placing some upwards pressure on rental yields after a long period of yield compression.

In summarising the May results, Mr Lawless confirmed that housing market conditions are now following a new trend, where regional markets are outperforming the capitals, affordable housing options are showing stronger conditions than expensive properties and the previously top performing regions are now the amongst the weakest. He noted that the trends are very different from city to city and region to region, with the headline indicators being heavily influenced by changed conditions in Sydney and Melbourne.

Tighter credit policies are the key factor in quelling housing market exuberance. In many ways, Mr Lawless believes the housing market is moving through a carefully managed slowdown. He said, "While previously, housing cycles have generally been influenced by changes in interest rates or economic conditions, the current easing in growth conditions is very much a factor of tighter credit policy.

"The most significant driver of this turnaround has been tighter credit availability, particularly for those borrowing for investment purposes. The concentration of investment activity has been heavily skewed towards Sydney and Melbourne, and it is these cities where market demand has fallen the most. Subsequently both cities have experienced more substantial declines in property values."

First home buyer demand has supported a reduction in investment activity "While the drop in the investor market was partially offset by an upswing in first home buyers, we are already seeing tentative signs that the stimulus of stamp duty concessions in New South Wales and Victoria is starting to wear off. First home buyer activity peaked in November last year."

A rebound in housing conditions is unlikely "With finance restrictions likely to remain tight, despite lifting the 10% growth cap on investment lending next month, the chances of a rebound in housing market conditions over the coming months is unlikely. Investors are still facing a premium on their mortgage rates of approximately 60 basis points; more if they are not paying down the principal."

"Add to that the fact that lenders have intensified scrutiny around a borrower's expenses and are now less willing to originate loans on interest only terms. Additionally, the prudential regulator, APRA, has advised banks to reign in lending on high debt to income ratios, which will more adversely affect the Sydney and Melbourne markets where housing is overall much more expensive than in other parts of the country. Lenders remain focused on keeping high loan to valuation ratio loans at low proportions of total lending, with the latest data indicating only 20.8% of new loans had a deposit of less than 20%," Mr Lawless said.

Additionally, a high number of units remain under construction, with demand impacted by fewer foreign buyers and less domestic investment in the market.

Although the exuberance has left the housing market and conditions have been dampened, Mr Lawless said it is clear that values are not falling off a cliff. He said, "Low mortgage rates are likely to persist for some time yet, and we're seeing high migration rates supporting housing demand. Although lower dwelling values will erode household wealth, falling home values will help to ease the affordability burden that has plagued the previously 'hot' markets of Sydney and Melbourne."

"While housing credit growth has slowed, the trends remain positive, especially for owner occupiers where housing credit is up 8%. Although the outlook for housing remains one where headline trends are likely to remain negative, we certainly don't see dwelling values declining significantly."

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