April 13, 2016

Australian housing market update – April 2016

NAB, in conjunction with CoreLogic (RP Data), brings you the Australian Housing Market Update for April 2016.

NAB, in conjunction with CoreLogic (RP Data), brings you the Australian Housing Market Update for April 2016.

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

Over the March quarter we saw the total value of Australian real estate reach a record high of 6.5 trillion dollars due to a combination of further capital gains and new dwelling construction.   Dwelling values across the capital cities rose by 1.6% over the first quarter of the year which is almost half the rate of value growth we saw at the same time a year ago when the March quarter of 2015 saw dwelling values rise by a much higher 3.0%.

The slowdown in home value appreciation has been evident since July last year when our combined capital city index was rising at the annual pace of 11.1%.  Since that time the annual rate of capital gains has slipped to a 31 month low of 6.4% at the end of March 2016.

While the rate of capital gain is broadly slowing, the trends from city to city and region to region are very different.  Home values peaked in Perth and Darwin during 2014 and have since fallen by 4.6% from their respective valuation peaks.  Every other capital city continues to see home values rising in trend terms, however the annual pace of growth has reduced substantially in Sydney, from a recent high of 18.4% per annum in July last year to the current annual rate of 7.4% and in Melbourne the annual growth rate has fallen from 14.2% to the current annual rate of 9.8%.

The reason for slowing housing market conditions are varied.  Mortgage rates experienced an out of cycle rise last year resulting in mortgage rates moving, on average, about 17 basis points higher.  Investors also saw an additional premium added to their mortgage rates in response to higher capital requirements for lending on investment properties.  The higher cost of debt is only one of the contributors to slowing housing market conditions.

Investor demand has been reducing since May last year after investment peaked at 54% of all new housing finance commitments.  The reduction in investment demand has been partially compensated by a rise in owner occupier demand, however there has been an overall reduction in investor appetite due to higher mortgage rates along with a low yield profile in Melbourne and Sydney as well as a growing acceptance that the housing market is moving through the peak of its growth cycle.

Housing affordability is also playing a role in the housing market slow down.  Capital city dwelling values are now 49% higher than they were at the beginning of 2009 while household incomes aren’t moving a great deal higher.  Sydney dwelling values have increased by 74% since the beginning of 2009 and Melbourne home values are 67% higher over the same time frame.  The substantially higher entry point to the housing market, particularly in the largest capital cities is creating a substantial price barrier for some segments of the market such as first home buyers.

Another factor contributing to slower housing market conditions is higher supply levels.  Dwelling approvals moved through a record annual high in October last year with almost 240,000 new dwellings approved for construction.  Medium to high density dwellings comprised half of the new dwelling approvals at the peak of the market, substantially higher than the decade average of 37%.

As housing market conditions slow, we are also seeing a slowdown in the number of homes selling.  Year on year, the number of dwelling sales nationally has reduced by 5.3% over the twelve months, with the largest reductions in the Northern Territory and Western Australia where the volumes of home sales has fallen by 23% and 11% respectively year on year.  The states where home sales have risen over the year tend to be the regions where the housing market has underperformed over the cycle to date, but where conditions are starting to improve.  Sales have moved slightly higher over the year in Queensland, South Australia and Tasmania.

Despite the slowing conditions, none of our indicators are suggesting home values are set to record a substantial fall.  Auction clearance rates are holding reasonably firm around the 70% mark, which is substantially higher than what we were seeing late last year.

Our private treaty metrics are also holding reasonably steady, with discounting rates showing only a subtle upwards trend while average selling time is higher due to the seasonal rise we see over the first few months of each year.

Let’s take a look at housing market conditions across each of the capital cities.

Sydney home values have increased by 2.0% over the first quarter of 2016 to take values 7.4% higher over the year.  Annual value growth in Sydney is now at its lowest level since August 2013, with growth having slowed sharply from its recent peak of 18.4% in July last year.  Over the past year, house values have increased by 7.5% which is a slightly greater increase than the 7.3% rise in unit values.  Rents are rising across the Sydney market, but at a rate that is well below the pace at which home values are rising.  Rents have increased by 0.8% for houses and by 3.4% for units over the past year in Sydney.  With capital gains outpacing growth in rents, gross yields have fallen over the year to reach 3.2% for houses and 4.2% for units.

Home values in Melbourne have increased by 2.2% over the first quarter of the year, taking them 9.8% higher over the year.  Although Melbourne home values have increased by a greater amount than all other capital cities over the past year, it is the cities slowest annual rate of growth since May 2015.  Annual value growth for Melbourne recently peaked at 14.2% in September last year and, although growth has slowed, it hasn’t decelerated as quickly as Sydney.  A large gap has opened up between the performances of houses versus apartments across Melbourne which likely relates to the higher supply levels in the unit sector.  House values are up 10.7% over the past twelve months compared with a 2.5% increase in unit values.  Rents have increased by 2.1% for houses and by 1.3% for units over the past year.  Melbourne rents are growing at their slowest pace since April 2013 with house rents up 2.1% over the past year and unit rents 1.3% higher.  With capital gains continuing to outpace growth in weekly rents, the yield profile in Melbourne remains the lowest of any capital city with houses providing an average gross rental yield of 2.9% while unit yields are recorded at 4.1%.

Brisbane is one of the few cities to have seen values fall over the past quarter, down -0.1% to March 2016 however, they are 4.5% higher over the past year.  The annual rate of capital gains is higher than the 2.7% at the same time last year indicating that the trend rate of growth is gradually improving despite the weak quarterly result.  Transaction numbers have also shown a subtle increase over the year suggesting an improvement in buyer demand.   Over the past year, value growth for houses has been much greater than units at 4.9% and 0.5% respectively.  Rental rates remain relatively soft across Brisbane, with house rents down 0.7% over the past 12 months and unit rents 0.6% lower.  With rental rates falling and home values rising, rental yields have trended lower over the year.  A year ago, yields were recorded at 4.5% for houses and 5.4% for units compared to 4.3% for houses and 5.3% for units currently.  Despite some yield compression, Brisbane rental yields remain amongst the highest across the capital cities.

Over the first quarter of 2016, home values in Adelaide have increased by 2.4% which has taken the annual increase to 3.2%.  Over recent years home values in Adelaide have generally continued to increase however, the rate of value growth has remained moderate.  House values in Adelaide have increased by 3.3% over the past year compared to a 2.0% rise in unit values.  Rental conditions haven’t been as strong, with Adelaide house rents falling by 1.1% over the past 12 months while unit rents are unchanged.  Although value changes have been moderate, the fact that home values are rising at a faster pace than rents has pushed yields slightly lower.  Gross rental yields are currently recorded at 4.1% for houses and 4.6% for units compared to 4.2% for houses a year ago and 4.7% for units.

Perth dwelling values have fallen by -0.9% over the first quarter of 2016 and are -2.0% lower over the past 12 months.  The -2.0% fall represents the largest annual fall in values of any capital city and home values in the city are now -4.6% lower than they were at their end of month peak in December 2014.  Over the past year, house values have fallen by -2.0% which is a marginally greater decline than the -1.9% fall in unit values.  Although home values are falling in Perth, rents have recorded much greater declines over the year down -8.3% for houses and -9.7% for units.  Given the much greater falls in rents compared to values, rental yields have fallen over the past year.  12 months ago, rental yields sat at 4.0% for houses and 4.6% for units compared to their current 3.8% for houses and 4.3% for units.

Home values in Hobart have increased by 6.5% over the first quarter of the year, taking them 4.8% higher over the past 12 months.  Based on this data, Hobart home values have recorded the third highest annual rate of value growth albeit the growth remains well below that of Sydney and Melbourne.  Over the past 12 months, house values have increased by 4.0% compared to a much greater 13.3% lift in unit values.  For both houses and units, annual rental growth has been nowhere near as strong as value growth, subsequently rental yields have fallen.  Hobart house rents have increased by 0.1% over the past year while unit rents have increased by 3.0%.  Gross rental yields are currently recorded at 5.1% for houses and 4.9% for units compared to 5.3% for houses and 5.4% for units 12 months ago.

Darwin home values have increased by 2.4% over the first quarter of 2016 however, they are -1.8% lower over the past year.  Darwin along with Perth, is the only city in which home values have fallen over the past year and home values are now -4.6% lower than their recent peak in July 2014.  Values are down across both the house and unit sector, with house values down 1.5% over the past twelve months compared with a 2.9% fall in unit values.  The annual decline in rental rates has been much sharper with house rents down 11.8% and unit rents falling by a similar -10.2%.  Darwin is likely to lose its title of highest yielding capital city during 2016 if these trends continue.  Gross rental yields have fallen substantially over the past year, with the average yield for houses falling from 5.7% a year ago to 5.1% currently while yields for units sit at 5.4% falling from 5.9% a year ago.

Canberra home values have increased by 1.8% over the first quarter of 2016 and are 1.7% higher over the past 12 months.  Canberra has recently been showing signs of value growth accelerating however, it has pulled back over the past few months with the lift unable to gain consistent traction.  The unit market continues to be a drag on the market with values down -0.9% over the year compared to a 1.9% increase in house values.  Canberra is the only capital city in which rental growth is currently stronger than it was a year ago with house rents increasing by 1.1% over the year and unit rents up 1.8%.  Gross rental yields for houses are unchanged over the past 12 months at 4.1%.  Meanwhile, unit yields have increased due to values falling while rents rise and have moved from 4.9% a year ago to 5.0% currently.

Outside of the capital cities, housing market conditions remain mixed.  Iconic lifestyle and tourism based markets like the Gold Coast, Sunshine Coast and Cairns in Queensland as well northern NSW areas such as Byron and Ballina are showing very healthy housing market conditions as these areas benefit from increased demand for lifestyle properties as well as a healthier tourism and retail sector.  In fact, most regional coastal housing markets that have a connection with holiday homes and tourism are now enjoying increasing sales and rises in home values.

On the other hand, areas associated with the mining sector are continuing to suffer from depressed housing demand, an oversupply of homes available for sale and rent as well as little in the way of new infrastructure announcements.  These areas have broadly seen large declines in home values and transaction numbers over recent years.

Mortgage demand has been slipping over recent months and the CoreLogic Mortgage Index, which tracks the number of mortgage related events across Australia’s largest valuations platforms, is indicating we are likely to see a further slowdown in new mortgages being written.  Mortgage related activity is currently -15.7% lower than at the same time last year across CoreLogic platforms, which indicates that demand for mortgages is currently much lower than it was a year ago.

Listing numbers are also rising which is providing prospective home buyers with more choice and consequently more ability to negotiate and more time to make their purchase decisions.   Listing numbers in Perth and Darwin have been elevated from some time now, however more recently, listing numbers in Sydney are starting to rise sharply despite the number of newly advertised properties trending lower.  The remaining capital cities continue to see the number of homes available for sale tracking relatively close to where they were a year ago, apart from Hobart where listing numbers are trending substantially lower.

Low mortgage rates should continue to drive housing demand, and there is a possibility the cash rate could move lower later this year.  That said, there is also the possibility that mortgage rates could rise later this year outside of any change in the Reserve Bank’s cash rate, or if the cash rate does fall, the full cut isn’t likely to be passed on to mortgage rates due to higher funding costs being faced by Australian lenders.

Overall, the outlook for the housing market continues to be one of moderating conditions, at least from a broad level.

The information in this video has been prepared by RPData Pty Ltd ABN 67087 759 171 trading as CoreLogic Asia Pacific (‘CoreLogic RPData’). CoreLogic RP Data is not related to NAB. The information in the video is provided for general information purposes only and is a summary based on selective information which may not be complete for your particular purposes. NAB does not accept liability for any loss or damage whatsoever which may   directly or indirectly result from any advice, opinion, information, representation or omissions, whether negligent or otherwise, contained in the video.  

More from NAB: