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Welcome to CoreLogics housing market update for February 2017, proudly supported by Westpac.  We are already into the second month of the New Year and CoreLogic figures show that housing market trends have continued on from the strong finish to 2016, posting a 0.7% rise in capital city dwelling values over the first month of the year.  Every capital city apart from Darwin recorded a rise in dwelling values based on the hedonic index results for January. Additionally, the results over the rolling quarter showed every capital city, including Perth and Darwin, recorded some upwards movement in values.

The January results take the rolling annual change in capital city dwelling values to 10.7% which is a substantially stronger result compared with a year ago when capital city dwelling values increased by 7.4%.  The higher growth rate is largely the result of stronger capital gain conditions over the second half of 2016 which coincided with two twenty five basis point cuts to the cash rate as well as a consistent rise in investment activity.

Sydney and Melbourne continue to stand out as the strongest housing markets, at least in annual trend terms.  Sydney dwelling values were up 16% over the past twelve months which was the cities highest rate of annual growth since the year ending September 2015.  The only cities to record a decline over the year were Perth and Darwin, however the rate of annual decline has decelerated over recent months suggesting the worst market conditions may now be behind these cities.

Hobart also stands out, with housing market conditions showing a rapid acceleration over the past seven months.  The annual pace of capital gains was tracking at 7.8% over the twelve months ending January, with homes selling in an average of 35 days compared with 47 days at the same time last year.  The sheer affordability of Hobart housing, as well as the lifestyle appeal and relatively strong rental market are likely to be some of the key drivers of housing demand across the southern most capital.

Importantly, late December and the first half of January will typically show a large amount of seasonality in the housing market, with transaction numbers fading away during the festive period.   The February hedonic index results should give a firmer indication about how the housing market is tracking in 2017, however auction results over the last week of January and first week of February were also pointing to a strong housing market start for the year.

Clearance rates in Sydney and Melbourne remained in the high 70% to mid-80% range, indicating that sellers are still enjoying strong market demand despite the dramatic increases in dwelling values seen over the past four and half years.

Other measures of selling conditions have also shown improved selling conditions.  The average rate of vendor discounting eased over the final six months of 2017, indicating that sellers were becoming less flexible on their pricing expectations and that buyers had lost some negotiation power.  Canberra, Sydney and Hobart were all showing average vendor discounting rates of less than 5% in December.

Similarly, the average selling time was trending lower across the combined capital cities as low stock levels created some urgency across the housing market.  Melbourne was the only city where dwellings were selling in less than 30 days, however Sydney, Hobart and Canberra were also seeing homes selling in less than 40 days over the final month of last year.

Housing market conditions across each of the capital cities:

Sydney: The Sydney housing market remains the hottest of any capital city, at least in terms of annual value growth.  Dwelling values were 16% higher over the past twelve months, with little difference in the pace of capital gains between houses and units.  House values were up 16.6% over the past year while unit values were 13.1% higher.  Since dwelling values started rising in mid-2012, Sydney dwelling values have surged 70.5% higher and dwelling values have doubled since the beginning of 2009.  The bi-product of such strong capital gains against a backdrop of soft rental conditions is that gross rental yields have pushed to a new record low in January.  Houses are now returning a gross yield of 2.8% and units are showing a slightly higher gross yield at 3.8%.

Melbourne: The Melbourne housing market continues to play second fiddle to Sydney’s higher rate of capital gain.  The past twelve months have seen Melbourne dwelling values rise by 11.8%, however a substantial chasm has opened between growth in house values relative to unit values.  The last year saw house values rise by 12.9% compared with unit values rising by a slim 2.8%. The underperformance can be attributed to ongoing concerns around unit supply across key areas of Inner Melbourne.  While dwelling values rose by almost 12% over the year, weekly rents were up by only 2.7%.  The result of strong capital gains and soft rental conditions is further yield compression.  January saw gross rental yields dip to a new record low, with houses averaging a gross yield of 2.7% and while unit yields were recorded at 4.0%.  Melbourne dwellings are selling at the fastest rate of any capital city, averaging 29 days on market.

Brisbane: The Brisbane housing market has continued to record a sustainable rate of capital gains, with dwelling values up 4.4% over the past year.  Value growth can be attributed entirely to higher house values, with unit values falling by 2.7% over the past twelve months.  Concerns around an oversupply of high rise units across key areas of the inner city are weighing down the performance of this sector of the market.  On paper, the Brisbane housing market is looking ripe for attracting higher buyer demand.  Housing prices are substantially lower than Sydney and Melbourne prices and yields are higher which should be attractive to investors.  The missing ingredient seems to be jobs growth and relatively soft, but improving, economic conditions.

Adelaide: Adelaide dwelling values have increased at a moderate pace over the past 12 months, rising by 4.8% over the past 12 months.  Although the annual rate of value growth is higher than it was a year ago, the pace of growth remains sustainable.  Adelaide has seen low, but positive, rates of capital gain for many years now, with values increasing by a cumulative 14.4% since the end of 2008.  Properties selling in Adelaide are averaging 43 days to sell which is the same length of time as they were taking a year earlier however, the time on market figure has been trending lower over recent months.  Gross rental yields have edged lower over the year, with houses now averaging a 4.0% gross yield and units showing a slightly higher average gross yield of 4.7%.

Perth: Perth dwelling values rose in January 2017 (+0.2%) and over the three months to January 2017 (+2.1%) however, they are still lower over the past 12 months (-3.2%).  Since dwelling values reached a recent peak in late 2014 they have fallen by a cumulative 7.7%.  There have been some tentative green shoots around the Perth housing market which may indicate that the western capital has reached or is close to the bottom of its cycle.  Apart from the monthly and quarterly rise in dwelling values, transactions numbers stabilised over the second half of 2016 and average selling time has trended lower.   Despite some signs of a subtle improvement in market conditions and the recent surge in commodity prices, any recovery in the Perth housing sector is likely to be a slow process considering the ongoing decline in interstate migration and soft economic conditions.

Hobart: Dwelling values in Hobart recorded the largest rise of all capital cities in January 2017, increasing by +1.4% over the month and 5.8% higher over the rolling quarter.  The latest figures have taken the annual rate of capital gain to 7.8% over the year ending January.  The improved housing market conditions come after more than a decade of moderate value rises.  Over the ten years to January 2017, Hobart dwelling values have increased by a total of just 15.6%.  The silver lining to such a long period of sedate housing market conditions can be seen in the very affordable housing prices in Hobart.  With a median dwelling prices of $366,000, Hobart is by far the least expensive capital city to be buying in.  The typical dwelling was taking 35 days to sell at the end of 2016 which is substantially lower than the 47 days they were taking at the end of 2015.

Darwin: Darwin was the only capital city to record a fall in dwelling values in January, down -1.7%, and values were -0.7% lower over the past year.  The Darwin housing market reached an end of month peak in July 2014 and since that time, values have fallen by a cumulative 7.3%.  Despite some recent monthly rises in values, any recovery in the top end market is likely to take some time.  Listing numbers remain high, providing a lot of choice and no real urgency for buyers. Dwellings are taking 86 days to sell currently compared to 74 days a year ago however, the figure has fallen from 110 days in July 2016.

Canberra: Dwelling values in Canberra increased by 0.4% in January to be 0.1% higher over the past three months and 6.7% higher over the last 12 months.  Although the annual rate of growth slowed from the December 2016 figure, values are still rising at a much faster pace than they have over recent years.  Canberra’s housing market has experienced relatively moderate value growth over recent years highlighted by the fact that values are just 33.3% higher since the end of 2008.  House values have increased by 6.8% over the past 12 months, outstripping the 5.8% increase in unit values over the same period.  Canberra homes are typically taking 37 days to sell currently compared to 47 days at the same time a year ago.

Over the coming year, it is anticipated that capital city dwelling values will continue to rise although it is expected that the rate of growth will slow.  Economic factors will continue to have a significant impact of the performance of the housing market broadly and across individual regions of the country.

Housing supply is likely to remain as one of the key issues in 2017, with particular focus on the high-rise unit sector.  While dwelling approvals and commencements have moved through their peaks, quarterly completions remain at close to historic highs while the number of new dwellings under construction also remains at a historically high level.  There are still many new developments, especially in the high-rise unit sector, under construction which implies settlement risk will worsen through the year.

There is already a divergence between the performance of houses and units in terms of value growth across some of the major capital cities.  Throughout 2017, as the unprecedented amount of high-rise units under construction approach settlement, it is anticipated that the divergence of capital gains between houses and units will widen further.

Additionally, affordability constraints, particularly in Sydney and Melbourne are likely to become more pressing, particularly if dwelling values continue to rise at a substantially faster pace than household incomes.

The ongoing growth in dwelling values has made the deposit hurdle insurmountable for some sectors of the community, with transactional costs such as stamp duty adding a further hurdle for market participation.  First home buyer participation in the housing market is tracking close to record lows, a trend which is intrinsically linked with housing affordability.

While first home buyers are comprising an increasingly smaller portion of the market, investors have consistently stepped up their participation in the housing market over the second half of 2016.  If the trend continues, we may see additional regulatory changes that could dampen investment demand.

Since the latest round of rate cuts in May and August last year, the value of housing finance commitments for investment purposes has increased by 32% through to the end of November last year.  Investors now comprise 48% of new mortgage demand nationally and 57% of new mortgage demand across NSW.

Finally, with the election of President Trump, the Brexit decision and mounting voter backlash globally, it would be understandable if consumer confidence retreated further during 2017.  Lower confidence could erode the willingness of households to enter into high commitments decisions such as purchasing a dwelling.

In any event, 2017 will be an exciting year for the housing market and, as always, Westpac will be updating you on the twists and turns of the housing market on a regular basis. 

Things you should know

Property data is supplied by CoreLogic, Westpac accepts no responsibility for its accuracy or completeness. We recommend you seek independent advice before making a decision based on this information.