Australian housing market update: October 2016

Get the latest monthly update on housing market conditions around Australia.


Welcome to CoreLogic’s monthly housing market update. This month we look at the rate of capital gain up to the end of September 2016 and examine some of the factors that have affected housing market conditions across the different regions.

CoreLogic’s September data showed a further 1% rise in dwelling values across the combined capital cities of Australia, following a 1.1% increase over the month of August and a 0.7% rise in July. The quarterly rate of growth increased to 2.9% across the capitals, which at face value is a strong trend of capitals gains, but well below the pace of capital gains a year ago when CoreLogic’s hedonic index was up by 4% over the September quarter.

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

The strong September quarter reading for home values was pushed higher by a 5.0% surge in Melbourne dwelling values and a 4.5% increase in dwelling values across the Canberra housing market. Sydney, where growth in dwelling values has generally been nation leading over the growth cycle to date, showed the third highest pace of dwelling value growth over the quarter at 3.5%. Highlighting the diversity in market conditions, three of the eight capital cities recorded a fall in dwelling values over the quarter, with the largest decline in Darwin where values were down 4.5%.

With dwelling values continuing to rise over the third quarter of the year across most of the capital cities, there is likely to be more focus on the factors that are driving growth in the housing market.

Low mortgage rates are likely to be one of the factors providing some upwards pressure to housing demand. Mortgage rates have been cut twice during 2016, with the most recent cut in August being the 12th reduction of the cash rate since November 2011. Australian borrowers haven’t enjoyed mortgage rates this low since the early 1960’s.

Investors are also contributing a higher than normal level of demand to the housing market. The latest data from the Australian Bureau of Statistics shows investors currently comprise 48% of new mortgage commitments. While that’s down from a record high of 55% last year, it still indicates investment in housing is providing a higher than normal level of demand. The value of investment mortgages has once again been trending higher since May this year.

Low stock levels are likely to be another factor at play in driving dwelling values higher in some cities. Low stock tends to create a level of urgency in the market, with vendor’s holding more leverage over buyers at the negotiation table and buyers generally having little time to undertake their due diligence to make an informed and strategic purchase decision. Nationally, stock levels are approximately 2% lower than a year ago but are now starting to show the normal spring ramp up which will provide a timely test of the market’s resilience to higher stock levels.

The shortage of stock may also be contributing to the lower auction volumes that have been a feature of the auction market this season. Despite clearance rates surging higher over the past few months, auction volumes have been tracking 16% lower over the first five weeks of the Spring season. Sydney’s auction clearance rate has been consistently above 80% each week during spring and the Melbourne clearance rate has been in the high 70% range.

Low stock levels are also contributing to a downturn in transaction numbers. Year on year transaction numbers are down 11% nationally, with falls recorded across most capital cities. While lower transaction numbers are likely to be related to a reduction in housing demand in markets like Perth and Darwin where dwelling values are falling, in stronger markets, like Sydney and Melbourne where year on year sales are down 18% and 20% respectively, lower turnover is likely to be more attributable to the low number of homes that are available for sale. Importantly, there is likely to be some level of upwards revision to transaction numbers as the record number of off the plan sales move through to settlement. Additionally, other factors such as affordability constraints, tighter lending policies and high transactional costs are also contributing to less housing market turnover.

Policy makers and regulators will be monitoring the housing market closely. The most recent statements from the Reserve Bank seem to indicate a less comfortable view on the housing market than previous months, citing a recent strengthening in some markets along with rental conditions that are the slowest in several decades. A broad reacceleration in housing market growth rates may make it more difficult for the RBA to lower interest rates further for concern of stimulating housing markets even further.

Despite the ongoing strength in the housing market, at least at macro level, there are plenty of headwinds that are likely to limit the pace of capital gains even if interest rates do move lower.

Banks have tightened their lending policies and generally require larger deposits.

Supply levels are at record highs and will trend higher over coming months as approvals move through to the construction phase.

Rental yields are at record lows which may start to act as a greater disincentive to investors, particularly in markets like Sydney and Melbourne where the gross yield on a house is now below 3%.

Housing affordability is becoming stretched, especially in Sydney where dwelling values have substantially outpaced household income growth.

Offshore investors are now a smaller component of housing demand due to stricter lending policies and more scrutiny around foreign buying rules.

Despite these headwinds, with conservative asset classes like cash or government bonds offering low returns and share markets remaining volatile, it’s likely that housing investment will continue to be a popular option. Although gross rental yields are at historic lows, they remain higher than rates for cash deposits and are quite attractive when you factor in the growth in home values as well as the yield, especially if investors are using larger deposits.

It’s certainly interesting times across the housing market and its certain that we will continue to see a great deal of interest in the performance of Australia’s largest asset class, housing.

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