March 2017 Westpac Property Market Update
Welcome to CoreLogic’s housing market update for March 2016. The latest hedonic index results from CoreLogic showed further growth in dwelling values across most of the capital cities. The February data showed capital city dwelling values rose by 1.4% over the month, once again being fuelled by Sydney and Melbourne, as well as strong capital gains across Canberra and Hobart where the performance of the housing market has been gathering some pace.
Weaker market conditions have persisted in the mining states, with dwelling values slipping lower over the year in Perth and Darwin, while Brisbane values also slipped over the month.
Focussing on the broader combined capital cities data, housing market growth conditions have been rebounding since the middle of last year, when, on two separate occasions, interest rates were cut and investor demand started to once again trend higher. Prior to this, the growth trend across the housing market had been slowing, reaching a cyclical low point over the twelve months ending July 2016 when the annual change in capital city dwelling values slowed to 6.1%.
Since that time the annual growth rate has almost doubled to reach 11.7% over the twelve months ending February this year. This is the fastest annual growth rate since June 2010.
Sydney has been the main driver of accelerating growth conditions across the CoreLogic combined capitals index. The past twelve months has seen the annual capital gain across Sydney reach 18.4%, which is the fastest pace of annual growth since December 2002.
The latest results from CoreLogic take the growth cycle into the 58th month, and capital city dwelling values have increased by a cumulative 47% over the cycle to date. Once again, Sydney stands out as showing the most spectacular capital gain, with values up 75% over this period, followed by Melbourne where dwelling values are 54% higher. The next best performer has been Canberra where dwelling values have increased by less than half the pace of Melbourne, up 23%.
The strong growth conditions across key markets have provided a substantial wealth boost for home owners, however, the flipside is that home ownership is becoming increasingly out of reach. This is especially true for price-sensitive segments of the market such as first time buyers and low income families.
Affordability challenges are most pronounced across the Sydney housing market where, based on September 2016 data, dwelling prices are almost 8.5 times higher than gross household incomes. The second most expensive capital city, Melbourne, has a dwelling price to income ratio of 7.1.
So, what is driving such strong growth conditions in some markets, while other markets see only modest growth or declines? It comes back to several key factors.
The first is economic conditions. Thanks to their strong services based economies, Sydney and Melbourne have accounted for the vast majority of full time jobs growth. Conversely, markets like Perth and Darwin, and to a lesser extent, Brisbane, have seen weak economic conditions and flat to negative full time jobs growth over a sustained period.
Another factor is migration rates. Since the end of the mining boom, the mining states have seen a sharp fall in migration rates that is detracting from housing demand. The non-mining states, particularly Victoria and New South Wales have continued to see strong migration trends from both overseas and interstate which is adding to demand for housing in the capital cities of these states.
Of course, the housing market dynamics are very different from city to city and region to region, so let’s take a look at each of the capital city housing market trends.
Sydney: The Sydney market has stood out amongst the capitals as showing the highest capital gains over the current growth cycle. Since the cycle commenced in June 2012, Sydney dwelling values have surged 75% higher, and values have more than doubled since 2009. While the strong gains have been a windfall for property owners, the negative by-product of such a sustained boom in housing values is low involvement from first home buyers, a deterioration in housing affordability and a severe compression of rental yields. The last twelve months have seen Sydney dwelling values increase by 18.4% which is the highest annual rate of capital gain since December 2002.
Melbourne: The Melbourne housing market has maintained a strong rate of growth with dwelling values rising a further 1.5% over the month to be 13.1% higher over the past twelve months and 54% higher since the current growth cycle commenced almost 5 years ago. While the headline growth rate remains high across the city, digging below the surface shows a substantial gap has opened up between growth in house and unit values. Over the past twelve months, Melbourne house values have increased by 14.2% while unit values are up by a substantially lower 3.3%. While the headline growth rate across Melbourne has been impressive, such a long and strong growth cycle has created some headwinds for first time buyers who are struggling with affordability. Another consequence of the strong capital gains has been an ongoing compression of rental yields. The average gross yield on a Melbourne house is now 2.7% which is a record low and the lowest of any capital city.
Brisbane: Brisbane’s housing market saw a dip in dwelling values over the month, with CoreLogic’s index slipping 0.4% across both the house and unit markets. The longer trend of results indicates the Brisbane housing market is seeing only modest capital gains which are confined to the detached housing sector. House values were 2.7% higher over the past twelve months while unit values fell by 2.1%. With a median house price of $485,000, Brisbane isn’t facing the same sort of affordability challenges as Sydney or Melbourne, however the lower cost of housing hasn’t been enough to spur growth rates higher. The missing ingredient is likely to be the weak rate of jobs growth which is stifling housing demand across the region.
Adelaide: Adelaide saw a 0.6% rise in dwelling values last month, taking the annual growth rate to a low, but sustainable 3.5%. While the growth trend across Adelaide has been subtle, dwelling values are continuing to see some upwards pressure at a time when economic conditions remain soft. The upwards trend in home values is being supported by a rise in dwelling sales, with settled sales across the state rising by 1.2% over the year. Apart from the modest rate of capital gains, rental yields are substantially higher than the combined capital city average, with houses providing an average gross yield of 4.0% and units showing a higher yield of 4.7%. The combination of solid rental returns and sustainable capital gains may be attractive to those investors who are looking outside of the mature growth cycles of Sydney and Melbourne.
Perth: Perth’s housing values slipped lower last month, breaking a four month run of positive movements. The 2.4% fall over the month takes the cumulative decline in Perth dwelling values to 10% since values peaked at the end of 2014. Apart from the recent, but short lived run of positive index movements, a few other factors were pointing towards a flattening in Perth’s downwards trend. Perth transaction numbers have levelled out after a long trend of reducing sales numbers and the average selling time was trending lower over the second half of 2016. However, with listing numbers remaining close to record highs, the buying conditions across Perth are still very much in favour of buyers over sellers, and vendors should have realistic pricing expectations if they expect to sell their property in this market.
Hobart: Hobart dwelling values moved higher last month, taking the annual growth rate to 5.8%. The southern capital has benefitted from a renewed level of demand from lifestyle buyers, as well as higher levels of investment demand. Hobart’s rental yields are the highest of any capital city, tracking at 5.0% for houses and 6.0% for units on a gross basis. With the median house price in Hobart remaining below $400,000, buyers are achieving great value for money in this market and I wouldn’t be surprised to see buyer demand rise further as the year progresses.
Darwin: Dwelling values in Darwin were down over the month, taking the annual decline to 5.3%. Since the housing market peaked in Mid-2014, Darwin dwelling values have fallen by a cumulative 11.5%. There has been a high level of volatility across the unit market which is attributable to the low number of transactions that is evident in this sector of the market.
Canberra: The Canberra housing market has been the third best performer for annual capital gains over the past twelve months, following behind Sydney and Melbourne. Dwelling values were 10.4% higher over the past twelve months, which is the highest annual growth rate since August 2010. Values have shown a substantial rise across both the house and unit sector, however houses continue to show a stronger performance than units, with values 10.5% higher compared with an 8.8% rise across the unit market.
It’s clear that the housing market is continuing to move through an accelerated phase of growth which is centred in Sydney, and to a lesser extent, in Melbourne, Canberra and Hobart. The rebound in the rate of capital gain is being led by a surge in investor demand which is being fuelled by low interest rates.
Despite credit growth for investment purposes flattening in December, we have continued to see other market indicators corroborate the strong capital gain results from CoreLogic over the first two months of the year.
Auction results have continued on from the strong trend of late 2016, with clearance rates holding consistently around the high 70% to mid-80% range from week to week. The last week of February saw a record number of auctions held for that month, with clearance rates edging higher despite the large number of auctions which had the potential to spread buyer numbers more thinly. In fact, the last week of February had the highest combined capital city clearance rate since June 2015.
Additionally, advertised listing numbers remain low across the hottest markets, with total advertised listings across Sydney tracking 11% lower from their already low base compared with the same period a year ago. The last week of February saw Melbourne advertised stock levels 5% lower than a year ago, while Hobart listings are down from a high base, falling by 35% and Canberra listing numbers were 6% lower than a year ago.
Low advertised stock levels in these markets are underpinning a sense of buyer urgency which is contributing to the upwards pressure on housing prices. The low number of homes being advertised for sale helps to explain why auction clearance rates are so high and why private treaty selling times are generally close to historic lows in strongest markets.
Overall, the latest results from the CoreLogic Hedonic Index highlights the performance diversity across Australia’s housing market. The continuation of the capital gains rebound is likely to create further discomfort among policy makers, particularly in light of the growing debate around affordability and the high level of demand from investors.
I remain of the view that housing market conditions will moderate during 2017 due to affordability constraints impacting on housing demand, as well as higher supply levels and an eventual slowing of investment demand brought about either through changed lending policies from Australian lenders or via regulatory changes aimed at slowing credit growth across the investment sector.
As always, a wide array of housing market data and commentary can be found at our web site, www.corelogic.com.au.