August Market Outlook

The Smartline Report – August 2016 Edition

August Market Outlook

Cameron Kusher, CoreLogic Research Analyst

August 2016

While the rate of value growth has slowed over recent months, the two largest and most expensive cities, Sydney and Melbourne, have continued to record relatively rapid rates of value growth.

CoreLogic is anticipating that the combination of slowing housing finance demand, stretched affordability, higher supply and tighter lending rules will result in slower value growth over the second-half of 2016, particularly in Sydney and Melbourne.  While values are expected to continue to lift, the expectation is that any increases will occur at a slower pace.

The ongoing diversity in the housing market highlights the different growth drivers that are evident from region to region.  The economies of Sydney and Melbourne remain relatively sheltered from the downturn in the resources sector and have benefited from a very healthy services sector and positive population inflows while the mining states and territories are experiencing softer economic conditions and a sharp wind down in population growth, particularly from overseas migration.

Over a year ago APRA advised Australian lenders that they couldn’t grow their investor housing credit by more than 10% per annum.  The most recent housing credit data has shown that investor housing credit has increased by just 5.0% over the past year, its slowest rate of growth since March 2012, before the current growth phase commenced.  Tighter serviceability limits and a recent crackdown on lending to investors from offshore has resulted in the fall in demand from the investor segment of the market.  The data indicates that there is scope for lenders to increase their lending to investors however, it remains to be seen as to whether there will be any significant uplift in demand from this segment.

Tighter lending policies, less offshore investment, record low rental yields, falling rental rates, higher housing supply and stretched housing affordability in Sydney and Melbourne would suggest that a slowing in value growth is imminent.  These factors are dynamic and change fairly quickly but CoreLogic is anticipating further slowing of value growth in Sydney and Melbourne throughout the remainder of 2016.  Markets like Brisbane, Hobart and Canberra may see an increase in housing demand as Sydney and Melbourne slow however, this will be driven by either investment or employment opportunities.  Investors may look outside of the two major capital cities but will be cautious of potential housing oversupply and those moving out of Sydney and Melbourne would want to be fairly confident of securing employment elsewhere.  We expect value growth in Adelaide to moderate from current levels but there is an expectation that values will continue to rise, albeit at a fairly slow pace.  The rate of decline in values in Perth and Darwin looked to be slowing over recent months however, they have gathered pace recently.  These markets remain in transition and values could continue to fall over the remainder of this year.

  • The CoreLogic Home Value Index shows that in July 2016, combined capital city home values increased by 0.8%.  Half of the capital cities recorded monthly rises in July with the other half recording declines.  Values rose in Sydney, Melbourne, Adelaide and Hobart and fell elsewhere.  Over the first seven months of 2016 combined capital city home values have increased by 6.3%.  It is estimated that at the end of July 2016, the total value of residential property nationally was $6.6 trillion.
  • Over the past three months, home values have fallen in Brisbane (-0.9%), Perth (-4.3%) and Darwin (-7.0%).  All other capital cities have recorded an increase in home values with values 2.9% higher across the combined capitals over that period.
  • Combined capital city home values have increased by 6.1% over the 12 months to July 2016.  This growth rate represents the slowest annual rate of growth since September 2013.  The annual rate of growth has slowed significantly from its recent peak of 11.1% in July 2015.
  • The two largest capital cities, Sydney and Melbourne, have recorded the largest increases in home values over the past year up 9.1% and 7.5% respectively.  Despite the fact they are the standouts for value growth, capital gains across both cities have slowed from their peak and it is Melbourne’s slowest rate of growth since April 2015.  Outside of Sydney and Melbourne, the annual changes in home values have been recorded at: +3.9% in Brisbane, +4.8% in Adelaide, -5.6% in Perth, +6.2% in Hobart, -7.6% in Darwin and +2.9% in Canberra.  Home values is Perth have now been trending lower since December 2014 and in Darwin they have been trending lower since July 2014.
  • Houses and units have recorded similar annual growth rates across the combined capital cities with house values 6.1% higher and unit values 6.0% higher.  Looking at the individual cities the trends are somewhat different.  In Melbourne, Brisbane and Canberra the annual rate of growth for units is less than half that than houses while in Darwin unit values have declined by more than double the decline for houses.  In Sydney and Hobart unit values have increased at a faster annual pace than houses.  Sydney in particular has expensive housing however, the median unit price in Sydney ($670,000) is $210,000 lower than the median house price which probably explains the slightly greater growth for units.
  • Home values are continuing to rise, albeit at a slower pace, meanwhile, combined capital city rental rates have continued to decline.  Combined capital city rents have fallen by -0.6% over the 12 months to July 2016.  Rental rates have fallen over the year in Brisbane, Adelaide, Perth and Darwin and are increasing at their slowest pace on record in Sydney.  With values rising and rents falling, gross rental yields (which are at record lows) are continuing to soften.  Combined capital city gross rental yields are currently recorded at 3.3%, down from 3.5% a year ago.
  • The volume of new stock becoming available for sale has increased a little over the past two weeks but is at close to record low levels outside of the Christmas and New Year period.  Over the past four weeks there were 22,798 unique new residential property listings across the combined capital cities which is -13.9% lower than a year ago.  While new listings are much lower than they were a year ago, there are currently 100,696 total listings which is 4.5% higher than a year ago.  These figures would seem to indicate that new supply is limited while a proportion of stock is remaining on the market for a longer time, potentially because sellers aren’t willing to adjust price expectations and/or negotiate on price.  New listings are lower than they were a year ago in all capital cities except for Perth and Hobart.  Meanwhile, total property listings are higher than they were a year ago in all capital cities except for Melbourne, Hobart and Canberra.  It will be interesting to see how much of a lift in new listings there are over the coming weeks as we head towards the Spring Selling Season.  The market’s reaction to an anticipated supply of new listings will also be important to gauge.
  • June 2016 data for the average days on market shows that the typical capital city home is selling after 47 days compared to 42 days at the same time last year.  Outside of the Christmas/New Year period, this represents the longest average time on market since August 2013.  Homes are taking longer to sell than they were a year ago in: Sydney, Brisbane, Perth, Darwin and Canberra, selling quicker in Adelaide and are unchanged in Melbourne.  Typical discounting levels are at a similar level to what they were a year ago, currently recorded at 6.1% compared to 6.2% a year ago.  Melbourne is the only capital city where discounting levels are lower than they were a year ago with rates unchanged in Sydney, Brisbane and Adelaide.
  • Auction clearance rates across the combined capital cities have been recorded above 65% for 20 successive weeks.  This level of auction clearance indicates ongoing value growth, particularly in Sydney and Melbourne however, volumes are much lower than they were a year ago.  The lower volumes are reflective of fewer overall listings but may also indicate that vendors are being more selective about the types of properties to take to auction.  In Sydney, auction clearance rates have been above 70% for 15 consecutive weeks while in Melbourne they have been above 70% for each of the past four weeks.
  • The CoreLogic Mortgage Index which tracks mortgage activity across proprietary platforms indicates activity fell in July 2016.  Mortgage activity was -8.6% lower over the month and -3.0% lower year-on-year.  This indicates that demand for mortgages eased in July following a fall in June, with activity much lower than it was 12 months ago.
  • In Sydney, home values have increased by 10.3% over the first seven months of 2016 but have increased by a lower 9.1% over the past year.  Sydney’s annual value growth is the highest of all capital cities although it is substantially lower than the recent peak growth rate of 18.4% a year ago.  Over the past year, unit values have increased at a slightly faster pace than houses, with values increasing by 9.4% and 9.0% respectively.  The $210,000 difference in median prices may explain the superior unit value growth performance.  Sydney rental rates have fallen by -0.1% over the year for houses and increased by 2.3% for units.  Rents are rising at a historically slow pace and with values continuing to rise rental yields continue to soften and currently sit at record lows.  In July 2016, gross rental yields were recorded at 2.9% for houses and 3.9% for units compared to 3.2% and 4.2% respectively a year ago.
  • Melbourne home values are 7.0% higher over the first seven months of 2016 and are 7.5% higher over the past 12 months.  The 7.5% rise is well down on the recent peak annual growth rate of 14.2% in September 2015.  The annual change in Melbourne home values is the lowest for the city since April 2015.  Over the past year, house values have increased by 8.0% which is more than double the 3.2% increase in unit values indicating much different value growth conditions across the two product types.  Rental growth remains moderate in Melbourne with house rents increasing by 2.1% over the past year and unit rents 1.6% higher.  The annual rate of rental growth is fairly similar to what it was a year ago however, value growth has been much stronger, which has pushed gross rental yields lower.  Rental yields for houses have fallen to 2.8% from 3.0% a year ago.  For units, yields are recorded at 4.0% currently, down from 4.1% a year ago.
  • Dwelling values across Brisbane have risen by just 1.3% over the first seven months of 2016 and are now 3.9% higher than they were a year ago.  Despite recent signs that the rate of value growth may have been accelerating, recent value falls have resulted in a slowing of the annual growth rate for the city.  House values have increased by 4.1% over the past year which is a growth rate more than double the 1.9% rise in unit values.  Although both property types are increasing in value at only a moderate pace there is a noticeable difference between growth rates for houses and units.  Despite only moderate value growth over the past year, Brisbane rental rates have fallen which is dragging gross rental yields lower.  House rents have fallen by -0.9% over the past year while unit rents are -1.3% lower, both of which are historically weak rental conditions.  12 months ago gross rental yields were recorded at 4.4% for houses and 5.5% for units compared to 4.2% currently for houses and 5.3% for units.
  • Adelaide home values have increased by 4.7% during 2016 up until the end of July and are 4.8% higher over the past year.  Growth in values has picked up over recent months in Adelaide however, values haven’t increased at an annual rate of more than 5% since September 2014.  House values have increased by 5.0% over the past year compared to a much lower 2.6%.  While annual value growth is accelerating, rents are continuing to decline with house rents -0.5% lower over the year and unit rents down -0.7%.  With values rising and rents falling, gross rental yields have softened over the year.  Gross rental yields are currently recorded at 4.0% for houses and 4.6% for units compared to 4.2% and 4.7% respectively a year ago.
  • Dwelling values in Perth have fallen by -4.7% over the first seven months of 2016 to be -5.6% lower over the past year.  Based on their end of month peak in December 2014, Perth home values have now fallen by -8.3%.  Values have fallen over the year for both houses and units with house values -5.6% lower and unit values down -5.8%.  Although dwelling values have fallen over the year, rental rates have recorded larger falls, which in-turn, has reduced gross rental yields.  House rental rates have fallen by -9.3% over the past year compared to a -7.7% fall in unit rents.  As a result of these falls, gross rental yields for houses have fallen from 3.9% a year ago to 3.8% currently and unit yields have fallen to 4.4% from 4.5% a year ago.
  • Hobart home values have surged so far this year, up 9.8% however, growth has been more moderate over the past 12 months, up 6.2%.  Hobart value growth has stalled over the past 10 years however, it has recorded the third highest rate of capital growth amongst capital cities over the past year.  Unit values have increased at a faster pace than houses over the past year, up 12.9% and 5.6% respectively.  Rental rates have increased at a similar pace to dwelling values over the past year with house rents 5.4% higher and unit rents up 14.2%.  As a result of values and rents rising at a similar pace, gross rental yields are unchanged over the year at 5.2% for houses and 5.3% for units.
  • Dwelling values in Darwin have fallen by -6.4% throughout 2016 to July and are 7.6% lower over the past 12 months.  Darwin home values reached an end of month peak in May 2014 and have declined by -12.7% since this time.  Although values have fallen over the year for houses and units, the declines across the more volatile unit sector (-14.6%) have been much greater than those for houses (-5.9%).  Although house and unit values have fallen over the year, rental declines have been much greater at -12.5% for houses and -29.0% for units.  With rents falling at a faster pace than values, gross rental yields have fallen over the year.  In July 2015, gross rental yields were recorded at 5.7% for houses and 5.5% for units compared to 5.3% for houses and 4.6% for units currently.
  • Over the first seven months of 2016, Canberra home values have risen by 3.7% and over the past 12 months they are 2.9% higher.  Canberra has seen consistently moderate growth over recent years with values just 10.5% higher over the past five years.  While growth has been moderate there has been a divergence in growth between houses, where values have increased 3.1% over the year, and units, where values are -0.4% lower over the year.  Canberra rental growth has actually accelerated over the past year with house rents increasing 1.8% and unit rents 2.4% higher.  As a result, of a pick-up in rental growth, gross rental yields have showed little change over the year.  12 months ago, gross rental yields were recorded at 4.1% for houses and 5.0% for units compared to 4.0% and 5.1% respectively at the end of June 2016.

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