April 2017 Westpac Property Market Update
Welcome to CoreLogic’s housing market update for April 2017. Capital gain conditions across the housing market have continued to gather pace, with CoreLogic reporting capital city home values rose by a further 1.4% in March to be 3.5% higher over the first quarter of the year and 12.9% over the past twelve months. The annual rate of growth was the highest since May 2010.
Dwelling values have been surging higher since the middle of 2016 when the cash rate was lowered by fifty basis points and investment demand started to rebound after slowing through most of 2015 and the first half of 2016.
While the resurgence of capital gains is most evident in Sydney and Melbourne, where the annual rate of growth has jumped to almost 19% in Sydney and 16% in Melbourne, the smaller markets of Canberra and Hobart are also seeing an acceleration in the rate of value growth. Adelaide and Brisbane continue to record more sustainable growth conditions, while dwelling values have continued to trend lower in Perth and Darwin on both a quarterly and annual basis.
There are plenty of reasons why the Sydney and Melbourne housing markets are showing such substantially higher rates of capital gain compared with other markets, however the broad factors relate to the high rate of population growth in these cities, the strong jobs market, which is reflective of the buoyant services and construction sector, and the large number of investors that are adding to housing demand.
Over the past twelve months, New South Wales and Victoria have accounted for just over two thirds of the nation’s population growth. The long term average suggests the ‘normal’ share of population growth in these two states is about 51%. Such strong population growth is a significant contributor to housing demand.
The past five years has seen New South Wales and Victoria comprise three quarters of the national number of jobs created. The long term average is a substantially lower 55%.
Finally, investment across New South Wales, and to a lesser extent, Victoria, is substantially higher than in other states. Based on January data from the Australian Bureau of Statistics, investors were responsible for almost 60% of housing finance commitments, excluding refinanced loans, across New South Wales and 46% across Victoria
With so much diversity across the regions, let’s take a look at housing market conditions across each of the capital cities.
Sydney: The annual pace of capital gains in Sydney reached a new cyclical high in March, with dwelling values surging 18.9% higher. The gain in house values almost breached the 20% mark over the past twelve months, increasing by 19.7%, while unit values were up 15.3%. While such a high rate of capital gain is creating significant wealth for home owners, affordability constraints are become severe, with first home buyers at record low rates of participation in the market. Renters aren’t facing anywhere near the same upwards pressure, with weekly rents increasing by only 1.4% over the past twelve months.
Melbourne: The Melbourne housing market has been experiencing exceptionally high demand which is being fuelled by the fastest rate of population growth since 2009. Dwelling values have surged 15.9% higher over the past twelve months, mostly driven by the strong conditions across the detached housing market where values are 17.2% higher over the past twelve months compared with a much lower 5.2% gain in unit values. Despite the high capital gains, Melbourne dwelling prices remain about $200,000, or 25% lower than Sydney’s, based on median prices. Rental markets remain relatively soft, with weekly rents rising by approximately 3.5% over the past twelve months. The low rate of rental appreciation compared with swiftly rising dwelling values has pushed rental yields to a new record low over the month.
Brisbane: Growth conditions across the Brisbane housing market remain sustainable, with house values increasing by 4% over the past twelve months. Brisbane’s unit market isn’t showing the same level of capital gains, with unit values virtually holding steady over the past year with a growth rate of just 0.2%. Interstate migration is starting to accelerate into Queensland which is a firm sign that housing demand is increasing, however weak labour market conditions and a large number of units under construction across key inner city regions has been, and may continue to be, a barrier to higher growth in dwelling values.
Adelaide: Dwelling values across Adelaide rose by 3.4% over the past twelve months, with house values rising at about double the pace of unit values. House values were 3.6% higher over the past twelve months, while Adelaide unit values increase by only 1.7%. Despite the reasonably soft, but steady rate of capital gain, the Adelaide rental market has remained subdued. Weekly rents have risen by 1% over the past twelve months, with the unit sector experiencing a decline in weekly rents over the year. Dwellings are taking a little bit more than two months to sell, on average, which is slightly faster than the same period a year ago.
Perth: The results for Perth showed a small rise in dwelling values over the month, however the broader trend in housing values remains negative across Perth, with values slipping 1.3% lower over the March quarter to be 4.7% lower over the year. A large number of Western Australian residents have departed for other states, with interstate migration figures indicating a net loss of approximately 2,500 residents from the state each quarter, which of course detracts from housing demand. Listing numbers remain high across the city, which is good news for buyers, who can negotiate hard and take their time in making a purchase decision. However selling conditions remain challenging, with homes selling in about 86 days after vendors apply large discounts to their asking prices.
Hobart: Annual growth in Hobart dwelling values has consistently improved over the past year, with dwelling values now rising at the annual rate of 10.2%. Detached houses are showing a substantially higher annual growth rate, at 11.0% compared with the unit market where values have increased 2.7% over the past twelve months. The local rental market is one of the strongest amongst the capital cities, with weekly rents up 8.1% over the past twelve months. The strong rental conditions are keeping Hobart yields the highest of any capital city which, together with the strong rate of capital gains, should be an incentive for investment.
Darwin: The Darwin housing market has been in a downturn since mid-2014, and dwelling values are 3.1% lower over the quarter and 4.4% lower over the past twelve months. Selling conditions remain challenging across the Darwin market with dwellings taking 111 days on average to sell while vendors are applying substantial discounts to their initial pricing expectations. High stock levels are providing buyers with plenty of choice and buyers can generally drive a hard bargain at the negotiation table.
Canberra: The annual pace of capital gain across the Canberra housing market is now the third highest of any capital city, with dwelling values increasing by 12.8% over the past twelve months. The high rate of growth is attributable almost entirely to detached housing, where values are 13.6% higher over the past year, compared with unit values which are only 1.6% higher. Selling conditions are generally strong, with advertised listing numbers trending lower, average selling time remaining short at 38 days and discounting rates the lowest of any capital city.
The latest housing market results have been accompanied by new policy announcements from the prudential regulator, APRA, and the Australian Securities and Investment Commission, aimed at reducing the amount of new loans being originated on interest only repayment terms. The APRA policy requires Australian lenders to reduce the proportion of new residential loan originations for interest only loans from the current rate of almost 40% to no more than 30%.
Additionally, lenders are required to ensure their serviceability metrics, including interest rate and net income buffers, are set at appropriate levels and that lenders continue to restrain lending in higher risk segments of their portfolio such as high loan-to-income lending, high loan-to-valuation ratios and loans over very long terms.
The existing 10% speed limit on annual growth in investment credit remains unchanged.
Further to these announcements, ASIC has also said they will be undertaking surveillance to examine whether lenders and mortgage brokers are inappropriately recommending more expensive interest-only loans.
These policies are likely to dent investment activity in the housing market, however, when taken in context with other market disincentives, there is the potential that investment exuberance could slow more sharply.
Investors are already paying a 40 basis point premium on their mortgage rates, and this could increase further if APRA requires lenders to hold more capital against their residential mortgages.
Additionally, rental yields are falling to new record lows each month, which indicates that dwelling values are out of balance with rents.
Dwelling value growth is also out of balance with income growth. The most extreme example is in Sydney where the latest estimates from the ANU Centre for Social Research and Methods show household incomes are rising at 4.6% per annum in Sydney while dwelling values are almost 19% higher over the same period. In fact, over the past five years, Sydney dwelling values are 75% higher compared with a 25% rise in household incomes.
With investors comprising slightly more than 48% of mortgage demand nationally, excluding refinanced loans, and almost 60% of mortgage demand in Sydney, less participation from this large segment of the market has the potential to take a lot of heat out of the housing market.
Regulators are likely to be mindful of the timing of an investor slowdown though and will probably be careful not to dial back investor demand too swiftly. The unprecedented level of new unit supply that is currently under construction is highly reliant on investors being able to settle their off-the-plan contracts. Settlement risk is already heightened across some key inner city unit markets and a further tightening in investment lending policies has the potential to create some challenges for the 150,000 or so units that will be transitioning from the construction phase to settlement.
If investment participation does trend lower, we should expect the pace of capital gains will respond to the diminishment of demand. The growth cycle has been running for almost five years and it is rare for housing markets to experience such as long and strong growth cycle.
In isolation, the additional lending policies are likely to have a relatively minor effect on housing market conditions, however when viewed in conjunction with affordability constraints, record low yields and rising mortgage rates, as well as a backdrop of record low wages growth and record high levels of household debt, it is looking more likely that the housing market is approaching a peak.
If you’re interested in keeping up to date with the housing market, check out our regular reporting at www.corelogic.com.au