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National housing conditions steady, led by a slowdown across the Sydney market

Posted on 9 October 2017

Source:  CoreLogic

CoreLogic August home value index results for the month confirm a slowdown in housing market conditions in Sydney, while Hobart emerged as the country's best performing capital city based on growth in dwelling values over the past twelve months.

National dwelling values remained flat during August, with capital city values edging 0.1% higher. Simultaneously, regional dwelling values slipped 0.2% lower.  According to CoreLogic head of research Tim Lawless, this steady result provides further evidence that the housing market has moved through its peak growth phase.

He said, "We're seeing capital gains in markets like Sydney, which were previously very strong, now being weighed down by affordability constraints and tighter lending conditions.  The knock-on effect is a curb in investment credit growth and higher mortgage rates for investment and interest only mortgages."

"Looking at the past three months, it provides a clear indication of the trends, with national dwelling values rising by only half a percent over the three months to August 31 - the lowest rolling quarterly gain since June last year.  The national market moved through a peak rate of growth during the three months ended November 2016, when dwelling values were rising at the rolling quarterly pace of 3.7%," Mr Lawless said.

The slowdown in growth conditions is most visible in Sydney, where housing values had been growing strongly. Since values started rising in 2012, the typical Sydney dwelling has seen its value rise by 75%, equating to an approximate dollar value gain of $521,000 on the median dwelling valuation.

Sydney's quarterly growth rate peaked over the three months ending October 2016 when dwelling values jumped by 6.3%.  Since that time, the rolling quarterly rate of appreciation in Sydney dwelling values has consistently eased, reaching the current rate of just 0.3%.

In Melbourne, the housing market has been more resilient to a slowdown. This is evident in the hedonic index results as well as auction clearance rates, which have consistently been above 70%. Inventory levels also remain exceptionally tight across the Melbourne market.  Melbourne's quarterly rate of growth has slowed since peaking at 4.4% in November last year, however the most recent three month period has seen dwelling values rise by 1.9%, less than half the peak rate of growth but substantially higher than Sydney's pace of capital gains.

Index results as at 31/08/2017


Change in Dwelling Values
 MonthQuarterAnnualMedian Value
Sydney 0.0% 0.3% 13.0% $909,914
Melbourne 0.5% 1.9% 12.7% $695,500
Brisbane 0.2% 0.2% 3.0% $488,757
Adelaide 0.0% 0.2% 5.2% $430,109
Perth -0.8% -1.6% -2.8% $462,927
Hobart 0.6% 1.9% 13.6% $383,438
Darwin -2.2% -4.7% -4.2% $449,234
Canberra 0.6% 0.4% 8.0% $575,173


Highlights over the three months to August 2017

  • Best performing capital city: Melbourne and Hobart +1.9%
  • Weakest performing capital city: Darwin -4.7%
  • Highest rental yield: Darwin 5.6%
  • Lowest rental yields: Melbourne 2.9%

Rental yields slipped to a new record low across Australia in August. Nationally, the gross yield on a dwelling reduced to  3.62%  in  August, down from 3.87% in August last year. "Record low yields are largely a capital city phenomenon, with  yields  across  the  combined  regional  areas of the country tracking 165 basis points higher than the combined capital city yield," Mr Lawless said.

While there was a reduction in gross rental yields across  each  of the capital cities over the past twelve  months,  only  Melbourne  (2.9%)  and Sydney (3.0%) are recording rental yields at record lows.  To  provide  some context about why yields  are  so  low  in  these  cities,  dwelling values in both cities are up approximately 13% over the past twelve  months while rents only increased by 4.7% across Melbourne and 4.0% across Sydney.

Mr Lawless said, "The imbalance between rental  growth  and  value  growth has been a constant  feature  of  the  housing  market  over  the growth cycle  to  date, however  with  the pace of  capital gains easing at the same time that rents trend higher, the  Sydney  and  Melbourne  markets could be approaching the bottom of their yield cycle."

A slowdown in home value growth is likely to be seen as a positive development by policy makers. "Slower growth conditions in Sydney,  and to a lesser extent Melbourne, are likely to  be a  welcome evolution     in housing market conditions by policy makers such as the RBA.  So far   the trend has been gradual,  implying  that  macroprudential  policies  are having a flow through effect on housing conditions."

"The growth cycle in both cities has run for five and a half years, providing a substantial wealth boost for home owners but also creating much  frustration  for  those  who  don't  own  a  home.    Sydney  and

Melbourne  dwelling  values  have  increased  by   75%   and   56% respectively since the growth cycle commenced in early 2012, however growth rates have been far  more  moderate  across  the  other  capital cities."

"The  policy  settings  around  investment  credit  growth  and  new  interest only settlement targets have seen credit policies tighten and pushed mortgage rates higher for both investor and interest only loans. These disincentives are likely  to  continue  to  weigh  down  investment  demand which will have a more pronounced effect in those  markets  where investors  are most  concentrated,"  Mr  Lawless said.

A highlight of the latest housing finance data from the Australian Bureau    of Statistics, shows New South Wales as having  the  heaviest  bias  towards investment with 58.5% of the value of all housing finance commitments being for investment purposes. Mr Lawless said, "Clearly, tighter credit policies and higher mortgage rates for investors are dampening the Sydney market more than others."

Another contributing factor to slower  home  value  appreciation  is  the  high  price  of  housing  relative  to  incomes,   particularly   in Sydney.

Affordability barriers are preventing some prospective buyers from participating in the market. Mr Lawless said, "The recent availability of stamp duty concessions in New South Wales and Victoria is likely to provide  some  support  for  first  time  buyers,  however  it's  not  likely  that that a rise in first home buyer activity will completely offset the  demand  gap left by fewer investors."

"Overall, the outlook for Australia's housing market depends on a broad range of factors including  local  economic  and  demographic  conditions  as well as supply factors  and  credit  polices.  However,  if  the  current trends continue, Sydney dwelling values could start to drift lower over coming months."

"If the current trends continue, by the end  of  the  year  we  could  see dwelling values across Australia's two largest housing markets, Sydney  and Melbourne, trend lower  as  they  move through their cyclical   peaks.

"Historically, a negative shift in home values has followed every growth phase, so it's reasonable to expect a period of moderate value falls following such a sustained period of strong capital gains."

With the Spring selling season about to commence, Mr Lawless said it will be interesting to monitor the impact of higher inventory levels on the Sydney and Melbourne market. "Particularly so given evidence of slowing growth conditions accompanied by stock levels already being higher than they were a year ago across both cities."



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