April Market Outlook

April Outlook

Cameron Kusher, CoreLogic Research Analyst

April 2017

Dwelling values have continued to rise in March 2017 according to the CoreLogic Home Value Index results. According to the data, combined capital city dwelling values increased by 1.4% in March 2017, to be 12.9% higher over the first quarter of this year. Over the month, dwelling values rose across each capital city. With values continuing to rise, so too has the total value of residential property, which at the end of March 2017 was estimated at $7.0 trillion.

Combined capital city dwelling values increased by 3.5% over the first quarter of 2017 and only Brisbane (0.0%), Perth (-1.3%) and Darwin (-3.1%) didn’t record a quarterly increase. On the other hand, each of Sydney (+5.0%), Hobart (+5.6%) and Canberra (+5.1%) recorded value growth of at least 5% over the first quarter of the year.

Combined capital city dwelling values have increased by 12.9% over the past year, which is the fastest annual rate of growth in the Index since May 2010. While the combined capital city index shows strong growth, the individual capital city performances remain diverse, with Sydney (+18.9%) and Melbourne (+15.9%) recording annual growth in excess of the combined capital city figure. Hobart (+10.2%) and Canberra (+12.8%) have also recorded value growth in excess of 10% over the past year, while the increases in Brisbane (+3.7%) and Adelaide (+3.4%) have been much more moderate. The Perth and Darwin housing market weakness persists, with values falling by -4.7% and -4.4% respectively over the past 12 months.

The divergent growth performance between houses and units has been evident across most capital cities over the past 12 months. Across the combined capital cities, house values have risen by 13.4% over the past 12 months compared to a 9.8% rise in unit values. Were it not for the relative strength of unit value growth in Sydney, the gap between the performance of house and unit value growth would be much wider. In Melbourne, Brisbane, Hobart and Canberra, the annual change in unit values has been less than a third of that of detached houses.

While combined capital city dwelling values have increased at their fastest annual pace since May 2010, rental growth remains sluggish – although it has picked up a little of late. Over the past year, capital city house rents have increased by 0.58% and unit rents are 1.7% higher. With rents growing at a much slower rate than values, rental yields have fallen over the past year. Across the combined capitals, gross rental yields sit at record-low levels of 3.0% for houses and 4.0% for units. Canberra’s gross rental yields are unchanged over the past year, while all other capital cities have recorded a softening of yields over the year.

Throughout most of this year there has been fewer new and total advertised properties for sale relative to a year ago. The latest data shows that over the 28 days to 2 April 2017, there were 43,269 new properties advertised for sale and 230,443 total properties advertised for sale nationally. While the total number of properties for sale was -2.3% lower than the previous year, new properties advertised for sale were 4.6% higher over the year. Across the combined capital cities there were 26,842 newly advertised properties for sale, which was 8.7% higher over the year, and 106,331 total properties available for sale, which was 2.8% higher year-on-year. Brisbane and Darwin are currently the only capital cities with fewer new homes advertised for sale over the past 28 days relative to last year. Most capital cities also have a higher number of total properties listed for sale compared to a year ago, with Hobart, Darwin and Canberra the only exceptions. While stock is generally higher than a year ago, it is important to note that 12 months ago it coincided with the Easter holiday, so that is affecting the year-on-year comparisons. In fact, all capital cities have recorded a decline in new properties advertised for sale over the past week and most have also recorded a decline in total property advertisements. The lack of stock for sale, particularly in Sydney and Melbourne continues to be a major contributor to the accelerating rates of value growth.

Days-on-market data for February 2017 show that homes were selling rapidly. Most years, the days-on-market figure spikes throughout January and February as selling activity is much quieter; whilst the days-on-market figure across the combined capitals reached 61 days in January, it fell to 45 days in February. To provide some context, in January 2016 the days-on-market figure was 65 days and in February 2016 it was 62 days, so the February 2017 days-on-market figure is substantially lower than it was a year ago, reflecting the strong housing market conditions so far this year. Brisbane and Perth are the only capital cities where it is currently taking longer to sell a home than it was a year ago.

Dwelling values in Sydney rose by 1.4% in March to be 5.0% higher over the first quarter of this year and 18.9% higher over the past 12 months. Sydney dwelling values are now increasing at their fastest annual pace since November 2002. Over the past year, house values have increased by 19.7%, slightly outstripping the 15.3% increase in unit values over that time. At the end of February 2017, Sydney dwellings were taking 29 days to sell, which was their shortest time on market since October 2015 and much less than the 59 days at the same time a year earlier. Over the past year, gross rental yields have fallen to record-lows of 2.7% for houses and 3.7% for units, from 3.2% and 4.2% respectively a year ago.

Melbourne dwelling value growth was recorded at 1.9% over the month of March 2017, taking values 4.2% higher so far this year and 15.9% higher over the past 12 months. The annual rate of growth for Melbourne is now at its highest level since August 2010. On an annual basis, the growth of unit values (+5.2%) is substantially underperforming growth in house values (+17.2%). Melbourne dwellings are currently taking 30 days to sell and although they were selling slightly quicker at the end of last year, they are selling much quicker than the 43 days they were taking to sell 12 months ago. Gross rental yields in Melbourne were recorded at 2.9% for houses and 4.1% for units a year ago. Rental yields are currently at a historic low of 2.7% for houses and 4.0% for units.

Value growth in Brisbane remains soft with values 0.2% higher in March, but unchanged over the first quarter of 2017 and 3.7% higher over the past year. Over the past five years, Brisbane dwelling values have increased by just 18.2%. Over the past 12 months, Brisbane house values have increased by 4.0% while unit values have increased by a much lower 0.2%. Brisbane dwellings are currently taking 68 days to sell, which is much longer than the 58 days it was taking a year ago. Brisbane gross rental yields have fallen over the past year to 4.1% for houses and 5.1% for units. At the same time last year, gross rental yields were recorded at 4.3% for houses and 5.3% for houses. Although yields are trending lower, they aren’t at historic low levels like they are in Sydney and Melbourne.

Adelaide dwelling values have recorded moderate growth over the past year, with values rising 0.4% in March 2017 to be 1.6% higher over the first quarter of this year and 3.4% higher over the past 12 months. Relatively slow growth has been a consistent theme over the past five years with values just 14.3% higher over the past half-decade. Over the past 12 months, Adelaide house values have increased by 3.6% compared to a 1.7% increase in unit values. Residential properties in Adelaide are currently taking 63 days to sell, which is slightly less than the 65 days it was taking 12 months earlier. Twelve months ago, gross rental yields in Adelaide were recorded at 4.1% for houses and 4.6% for units. Currently rental yields are recorded at 4.0% for houses and 4.5% for units.

Dwelling values in Perth have increased over the past month, up 1.0%; however, they have fallen over the first quarter of 2017 (-1.3%) and are -4.7% lower over the last 12 months. Since their end -of-month peak in December 2014, Perth dwelling values have now declined by -9.1%. Both houses and units have recorded a decline in values over the past year, falling by -4.6% and -5.5% respectively. Dwellings in Perth currently take 86 days to sell compared to 79 days at the same time a year ago. Perth dwellings are currently taking longer to sell than they have over any month since February 2009. Gross rental yields in Perth have softened over the year and are currently recorded at 3.6% for houses and 4.2% for units. At the same time a year ago, yields were recorded at 3.8% for houses and 4.3% for units.

Growth in Hobart dwelling values continues to escalate, increasing by 3.1% in March 2017, 5.6% higher over the first quarter of this year and 10.2% higher over the past 12 months. Hobart dwelling values have increased by just 18.5% over the past decade with values rising by 15.6% over the past two years. Over the past year, house values have increased by 11.0% compared to a much more moderate 2.7% increase in unit values. Dwellings in Hobart were typically taking 53 days to sell in February 2017 which was substantially less than the 63 days they were taking a year earlier. Gross rental yields in Hobart have eased slightly over the past year for houses, falling to 4.9% from 5.1% a year ago. Rental yields for units have risen to 5.6% over the past year compared to sitting at 4.9% a year ago.

Although Darwin dwelling values increased by 3.1% in March 2017, they were -3.1% lower over the first quarter of the year and -4.4% lower over the past 12 months. Over the past five years, Darwin dwelling values have increased by a total of just 3.8%. Over the past 12 months, Darwin house values have fallen by -7.0% while unit values have increased by 6.9%. Darwin dwellings are currently taking 111 days to sell, which is slightly less than the 116 days they were taking to sell a year earlier. Gross rental yields in Darwin were the strongest in the nation a few years ago but have undergone substantial falls recently. Rental yields are currently recorded at 5.0% for houses and 3.6% for units, compared to 5.1% and 5.4% respectively a year ago.

Canberra dwelling values have increased by 1.4% in March 2017, taking them 5.1% higher over the first quarter of this year and 12.8% higher over the past 12 months. The 12.8% increase in Canberra dwelling values over the year is the fastest annual rate of growth for the city since July 2010. Over the past 12 months, Canberra house values have increased by 13.6% compared to a 1.6% increase in unit values. Residential properties in Canberra are currently taking 38 days to sell, which is less than half the 79 days they were taking to sell at the same time in 2016. Gross rental yields are currently recorded at 4.0% for houses and 5.2% for units. A year ago, rental yields were higher for houses at 4.1% and lower at 5.0% for units.

At this time last year, we were commenting that the rate of growth in the housing market was slowing as investor activity had slowed, resulting in slower rates of value growth and softer rates of auction clearance. During 2016, there were two, 25-basis point cuts to official interest rates and investors started to return to the housing market. This has propelled values higher, particularly so in Sydney, Melbourne, Hobart and Canberra, while the performance of value growth outside of these cities is largely unchanged. The annual growth in values in Sydney, Melbourne and Canberra is now at its highest levels in many years.

The ongoing growth and the recent acceleration of growth has seen the banking regulators step back into the market with fresh policy announcements. While the regulators don’t specifically target housing values, there is clearly some concern about mortgage quality currently, particularly with regards to investors. The recent changes to lending policies will reduce the flow of new mortgage lending for interest-only mortgages to 30% of lending. There is also a fresh push for a greater proportion of mortgages to be written, with a deposit of at least 20% of the purchase price. Finally, regulators have also flagged an intention to increase the lender’s capital requirements for mortgages. In all likelihood, these combined factors will result in tighter lending conditions for investors and further out-of-cycle mortgage rate increases with these costs passed on to borrowers.

Economic factors continue to have a significant impact of the performance of the housing market broadly and across individual regions of the country.

New dwelling approvals are now well below recent peaks; however, they have increased over the past two months and they remain above long-run average levels after having been at a heightened level over the past three years. The recent decline in approvals has largely been led by units; however, house approvals have also eased. House approvals in February 2017 were -4.4% lower than a year ago, and unit approvals were -5.4% lower which indicates that dwelling commencements and, subsequently, completions are set to fall.

The level of mortgage demand from investors has continued to rise while demand from the owner-occupier segment has stalled over recent months. Investors committed to $13.8 billion worth of housing finance in January 2017, which was 4.2% higher over the month and just -5.3% lower than its historic peak. Owner occupier housing finance commitments had a total value of $20.1 billion in January 2017 which was -0.2% lower over the month and they were -3.7% lower than their historic peak over the month. The escalating mortgage demand from the investment sector has certainly been a contributing factor to the recent round of macroprudential measures announced.

During 2016, the Reserve Bank reduced the official cash rate by 25 basis points on two occasions. As a result, official interest rates fell to historically low levels and although mortgage rates didn’t fall by the full 50 basis points over the year, their reduction made borrowing for a mortgage more affordable and helped support demand for housing. Over recent months, many lenders have started to lift mortgage rates independently of the RBA and we are likely to see more of this occurring over the coming months. Subsequently, we could see an increase in mortgage refinancing activity as borrowers shop around for better rates on their loans.

Over the last month, the ABS published an update to their quarterly demographic data, which showed that Victoria remains the population growth powerhouse. The data to September 2016 showed that the national population increased by 348,695 persons, or by 1.5% over the year. Victoria was the only state to record population growth of more than 1.5% with its population increasing by 2.1% over the year. The increase in population is becoming much more focused on New South Wales (31.4% of national growth) and Victoria (36.6% of national growth); combined, these two states accounted for a record high 68.0% of the national population increase over the year.

Net overseas migration added an additional 193,223 persons to the country over the year, its greatest addition since March 2014, while natural increase added 155,472 persons to the national population over the year. Like the overall population trends, net overseas migration was largely concentrated within New South Wales (39.6%) and Victoria (35.5%), with the two largest states accounting for a historic high 75.1% of total net overseas migration over the year.

Although interstate migration has no effect on national population growth, it does tell you a lot about individual state performances. Over the year, net interstate migration to Victoria was at a historic high of 17,185 persons, while Queensland saw its highest level of net interstate migration since June 2009 with a net 12,966 persons shifting to the state. New South Wales recorded an outflow of 11,733 residents over the year, its largest annual outflow since September 2013 and Western Australia saw a net loss of 9,198 residents, which was its largest decline on record.

It is anticipated that the banking regulators’ work is not yet done and over the coming months they will announce further tweaks to macroprudential policies aimed at ensuring lending quality and with an aim to ensure lenders are holding sufficient capital against their residential mortgages. Whether these policy initiatives ultimately result in a cooling of growth in Sydney and Melbourne remains to be seen, as other factors such as high levels of housing equity, low levels of housing stock for sale, relatively stronger economic performances and high rates of population growth are also contributing factors to the escalation in values in these two cities.

While values continue to rise, particularly in Sydney and Melbourne, so too does the deposit hurdle for anyone who doesn’t already own a home. We recently analysed the value of lending to owner occupier first home buyers and in January 2017 they accounted for a record-low 7.1% of the value of housing finance commitments. In New South Wales this figure was much lower at 3.5% and in Victoria they accounted for 7.7%. The data shows that currenly owner-occupier first home buyers are not very active in the major markets, what is unclear is how many are purchasing investment properties as their first homes.

For those who already own residential property, in Sydney and Melbourne they are continuing to see their equity increase and this is leading to increased reinvestment in the housing market. The higher cost does come with higher rates and higher agency fees, and stamp duty if/when the home owners choose to sell and subsequently purchase another dwelling. The high exit and re-entry costs are likely to be contributing to the low levels of stock being advertised for sale. Owners are perhaps looking at the cost to move and the risk of not being able to sell and buy quickly, and instead are choosing not to move for the time being.

Although value growth has continued to accelerate in Sydney and Melbourne over the past month, we believe that throughout this year regulators will find effective ways to slow down the growth in these two cities. Affordability factors may also contribute to a slowing of value growth; however, the rapid level of population growth to each city continues to create additional demand at a time when the amount of established housing stock for sale remains lower than it has been for many years.

In Hobart and Canberra, it is anticipated that the quite strong levels of value growth will continue throughout this year. The increases in values in these two cities are being supported by improving economic conditions along with stronger population growth.

Brisbane and Adelaide are expected to continue to see moderate increases in values over the coming year. Although dwelling values are much lower than those in Sydney and Melbourne, the relatively weaker economic conditions and slower rates of migration continue to hamper these cities compared to Sydney and Melbourne. If the current uptick in net interstate migration to Queensland persists, we would expect that value growth in Brisbane may accelerate – but it is unlikely to see values rise at the levels we are seeing in Sydney, Melbourne or Canberra.

Perth and Darwin continue to see values decline and the recent macroprudential policy announcements are unlikely to assist in a recovery in these housing markets. Both cities continue to see a relatively high volume of stock available for sale, although it is slowly falling. Demographic trends are also unfavourable for a turnaround in housing market conditions with net overseas migration having slowed dramatically and the outflow of net interstate migration having accelerated. Overall we expect further weakness in these two housing markets; however, if the amount of stock available for sale continues to diminish, we may see a slowing in the rate of value declines.

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