Australian housing market update: July 2016

Welcome to the CoreLogic overview of Australian housing market conditions for July 2016.

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Take a look at the national update or your capital city update by clicking on the relevant link below:

The pace of capital gains showed some moderation over the month of June, slowing to 0.5% after CoreLogic’s home value index surged by a total of 3.3% over the previous two months.

Although the headline results showed a reasonably strong rate of growth in dwelling values, five of Australia’s eight capital cities recorded a fall in June. Monthly declines of more than 1% were seen in Darwin, Adelaide and Canberra, while the falls in Brisbane and Perth were less severe.

The June growth figure can be attributed once again to strong gains in Sydney and Melbourne where dwelling values rose by 1.2% and 0.8%. Hobart also showed a substantial rise of 1.8% over the month.

While the higher rates of capital gains in Sydney and Melbourne can be tied back to strong economic conditions, and high rates of population growth, the same cannot be said for Hobart where economic conditions and migration rates are gradually improving from a low base.

The rise in capital city dwelling values in June has pushed the year to date growth rate up to 5.5% which is slightly higher than the 5.1% increase recorded over the first half of 2015. With the recent surge in monthly growth, the annual pace of capital gains has rebounded from a recent low of 6.4% earlier this year to reach 8.3%, however the annual trend remains well below the peak of 11.1% seen in July last year.

While home values are continuing to rise, rental markets are experiencing very different conditions. Over the 12 months to June 2016, combined capital city rental rates have fallen by -0.6% which is their largest annual fall on record. The only cities to record a rise in average house rents over the past twelve months have been Melbourne, Hobart and Canberra. The remaining capitals all saw rents fall over the past twelve months, with the largest declines in Darwin and Perth where average weekly house rents were down 12.9% and 8.7%

With home values rising and rental rates contracting, investment rental yields have compressed to new record lows in June. Capital city gross rental yields are currently recorded at 3.3%, down from 3.6% a year earlier. The Hobart unit market is the only capital city to record a rise in rental yields over the year, thanks to a strong rise in weekly rents over the past twelve months.

Sydney and Melbourne are showing the lowest rental yields of any capital city with houses providing an average gross yield around the 3% mark in both cities while unit yields are slightly higher, averaging approximately 4%. The low yield scenario implies that most investors would be experiencing a negative cash flow on their investment, at least over the first few years of ownership.

In a sign that buyers might be finally getting some leverage back in the market place, the average selling time is starting to move higher across the capital cities index. The average selling time is currently tracking at 45 days for those homes sold by private treaty, compared with 39 days a year ago. One of the largest jumps in average selling time is in Sydney where the average sale period has extended from 26 days a year ago to 40 days.

Vendor discounting rates are also generally expanding, suggesting sellers are having to offer up higher discounts on their initial listing price in order to make a sale.

Both of these indicators provide a hint that housing market conditions may be moving through the peak of the cycle.

Housing market conditions across each capital city

Sydney:  Dwellings values in Sydney were up a stunning 6.8% over the June quarter and the annual rate of growth has bounced back to 11.3% after several strong months of capital gains. The annual pace of growth is still a long way off the peaks achieved in July last year when values rose by 18.4%. Some positive news for Sydney buyers is that there are early signs that Sydney’s housing market may be starting to turn in favour of the buyer. We’re seeing homes in the city taking longer to sell and vendors are starting to offer larger discounts on their asking prices in order to make a sale. The typical Sydney home is now taking 40 days to sell compared with 26 days a year ago and discounting rates have risen from 5.5% a year ago to 5.6%.

Melbourne:  Melbourne’s housing market remains the strongest performing capital city over the past twelve months, with dwelling values up 11.5%. Dwelling values were previously rising at a faster pace, with annual growth peaking at 14.2% in September last year. Melbourne homes are selling at the fastest rate of any capital city, averaging just 34 days on market for homes sold by private treaty, however the number of days on market is slightly higher than a year ago. The local unit market continues to substantially underperform compared with detached housing. Unit values are rising at half the rate of house values which can likely to be attributed to high supply levels in the inner city area which may be acting to drag confidence lower across the broader Melbourne unit market.

Brisbane:  Brisbane dwelling values recorded a fall in June with house values declining by 0.1% and unit values down a larger 0.5%. Despite interstate migration improving and stronger jobs growth, the Brisbane housing market is struggling to maintain a consistent pace of growth. Dwelling values have risen by 5.3% over the past twelve months, mostly fuelled by growth in house values which have moved 5.6% higher over the year while unit values show a lower growth profile. Despite the low rate of capital gains across Brisbane’s unit market, gross rental yields are the second highest of any capital city at 5.2% which may attract further investment into this market.

Adelaide:  The trend in Adelaide’s housing market is one of modest growth, however the monthly figures showed a decline in dwelling values in June. Adelaide’s housing market has seen values rise by 2.2% over the past twelve months. While home values are rising, rental rates have shown a modest fall over the year, down -0.4% for houses and -0.8% for units. The fact that values have increased while rental rates have fallen has dragged gross rental yields lower. House yields have shifted from 4.1% to 4.0% over the past twelve months and unit yields are currently recorded at 4.8% from 4.9% a year earlier.

Perth:  The Perth housing market has continued its trend of weak capital growth conditions, with dwelling values falling a further 3% over the June quarter. Since the Perth housing market peaked in December 2014, dwelling values are down by almost 7%. Arguably more concerning is the fact that weekly rental rates are down by almost 9% over the past year for houses and 7.6% lower for units. The fact that both dwelling values and dwelling rents are falling across Perth is a firm indication that buyer demand remains weak and prospects for capital gain remain dim. Residential properties are taking, on average, 69 days to sell and vendors are discounting their initial asking prices by an average of 7.8%, highlighting this is well and truly a buyers’ market.

Tasmania:  The housing market in Hobart seems to have turned a corner. The quarterly growth figures show Hobart dwelling values are up 1.9% over the second quarter of the year and values have shifted 6.2% higher over the past twelve months. The strength in the Hobart market comes after a long period of underperformance, where home values in the city increased by only 1.4% per annum over the past ten years. Potentially, the Hobart housing market is being fuelled by the sheer affordability of housing and a renewed trend towards Melbourne and Sydney buyers unlocking their equity to make lifestyle housing purchases. Rental yields are now the highest of any capital city which is likely to be attractive to investors.

Darwin:  The Darwin housing market saw another month on month fall in dwelling values in June, taking the quarterly decline to -2.5% and the annual fall in values to 1.1%. Home values in Darwin reached their most recent peak in May 2014 and have fallen by a total of -6.9% since then. Rents are falling at a faster pace than dwelling values which has pushed Darwin rental yields lower. For a long time, Darwin yields have substantially eclipsed the yield profile of other capital cities, however, with substantial falls in weekly rents, the yield profile in Darwin has deteriorated markedly, particularly in the unit sector.

Canberra:  Canberra home values were down 1.1% in June, however the broader trend remains positive. Over the June quarter Canberra dwelling values were 2.6% higher and the annual pace of growth is 3.9%. Although overall growth is moderate, the pace of capital gain has been substantially higher for houses compared with units. House values were up 4.1% over the financial year compared with a 1.7% rise in unit values. Rental markets have also turned around. Twelve months ago, Canberra house and unit rents were falling whereas over the last 12 months rental rates have increased by 1.9% for houses and 2.2% for units.

The growth cycle has now been running consistently for four years, taking capital city dwelling values 37.3% higher over the cycle to date. Sydney has well and truly outpaced all other capital cities for appreciation in dwelling values, recording a 59.3% capital gain over the growth cycle to date. Melbourne dwelling values are 40.5% higher, with the next best performing capital city being Brisbane with a much lower growth rate of 18.3%.

Such a strong and sustained rate of appreciation has pushed rental yields to new record lows and caused a deterioration in affordability, especially in Sydney and Melbourne where the pace of capital gains has been remarkably high.

The June reduction in the monthly rate of growth is likely to be very much welcomed by federal and state government policy makers and regulators who may have been becoming concerned about a sustained rebound in capital gains.

In our view, the rate of capital gain is likely to decelerate further over the remainder of the year due to a range of factors including affordability constraints, low rental yields, and a growing acceptance that the growth cycle is likely to be at or close to its peak.

Recent dwelling price to income measures released by CoreLogic, using household income data from the Australian National University, show Sydney’s dwelling price to income ratio has reached 8.2, indicating that dwelling prices are 8.2 times higher than annual household incomes. Melbourne shows a healthier affordability index compared with Sydney, however, dwellings prices remain 6.8 times higher than household incomes.

As the year progresses, further interest rate cuts are likely which should bring mortgage rates down even further. Whether lower mortgage rates will stimulate the housing market is yet to be seen, however a rebound in home value appreciation is likely to be on the regulatory radar. If the pace of capital gains remains consistently high, there is the potential for a further regulatory response aimed at keeping a lid on the pace of capital gains in the housing market whilst allowing low interest rates to stimulate the broader economy.