February Market Outlook
Cameron Kusher, CoreLogic Research Analyst
Capital city dwelling values continued to rise in January 2017 according to the CoreLogic Home Value Index. Combined capital city dwelling values increased by 0.7% in January 2017 to take values 10.7% higher over the past year. Darwin was the only capital city in which dwelling values fell in January 2017. Over the three months to January 2017, capital city dwelling values increased by 2.3% and they rose across each capital city housing market. The recent increases have taken the total value of residential housing stock to $6.9 trillion according to CoreLogic’s estimates.
Over the three months to January 2017, Hobart recorded the greatest increase in values rising by 5.8%. Sydney and Melbourne also recorded fairly substantial increases over the three month period with values rising by 2.7% and 2.4% respectively.
Dwelling values increased by 10.7% over the 12 months to January 2017. Sydney dwelling values have increased by 16.0% over the 12 months to January 2016 with Melbourne (11.8%) the only other city to record double-digit value growth over the year. Dwelling values have also increased over the year in: Brisbane (4.4%), Adelaide (4.8%), Hobart (7.8%) and Canberra (6.7%). While values are rising across most capital cities, values are -3.2% lower over the year in Perth and -0.7% lower in Darwin.
Looking at the performance of houses compared to units, capital city house values increased by 11.1% over the 12 months to January 2017 compared to an 8.0% increase in unit values. With a near record-high pipeline of units under construction, it is anticipated that the growth in unit values will continue to lag that of houses throughout 2017.
Gross rental yields have softened to record low levels due to ongoing rises in dwelling values and weak rental conditions. At the end of January 2017, the combined capital city gross rental yield for a dwelling was recorded at 3.2%, down from 3.5% a year earlier. The gross yield on capital city houses has fallen from 3.4% a year ago to 3.1% at the end of January 2017, while the gross yield on capital city units has also compressed, down from 4.2% a year ago to 4.0% in January 2016. Gross rental yields are marginally higher over the year in Canberra, are unchanged in Hobart and are lower across all other capital cities. Rental yields are currently at historic low levels in Sydney and Melbourne. Record low yields in the two cities with the greatest rises in home values and the highest levels of investor market participation points to the fact that most of these investors are targeting capital gains rather than rental returns when choosing to invest in residential property.
At this time of year, the number of homes advertised for sale is starting to climb following a dormant period from Christmas to mid-January. Nevertheless, it is worthwhile to look at how the number of advertised properties for sale compares to a year ago. Over the week ended 29 January 2017, there had been 20,083 newly advertised properties for sale over the previous four weeks and 91,634 total advertisements across the combined capital cities. The number of newly advertised properties for sale was -20.2% lower than they were a year earlier and total advertisements were -8.5% lower year-on-year. Newly advertised properties for sale were lower than they were a year ago in each capital city. The total number of advertised properties is currently lower than a year ago across all capital cities except Perth. Newly advertised properties for sales are more than 20% lower than a year ago in each of Melbourne, Brisbane, Adelaide, Hobart and Darwin. The total number of homes for sale is more than 10% lower than a year ago in each of Sydney, Melbourne, Adelaide, Hobart and Canberra. Given the amount of stock listed for sale is likely to rise over the coming weeks it will be interesting to see how quickly it lifts and how it compares to stock levels from a year ago which were already considered to be quite low.
Capital city dwellings were selling fairly rapidly at the end of 2016 and it wasn’t only being driven by rapid rates of sale in Sydney and Melbourne. Capital city dwellings were taking an average of 38 days to sell at the end of 2016 compared to 41 days at the end of 2015. Dwellings sold quicker at the end of 2016 than at the end of 2015 in Sydney, Melbourne, Hobart and Canberra while the days on market figure was unchanged in Adelaide. Each of the cities recording a more rapid rate of sale than a year earlier were on average seeing homes sell in less than 40 days. Even though homes were taking longer to sell in Perth and Darwin than they were a year earlier, over recent months the average days on market figure has begun to trend lower.
Those homes selling for less than their initial list price are seeing the level of discounting continue to decline. At the end of last year, the average vendor discount was recorded at 5.6% across the combined capital cities, down from 6.2% a year earlier. In fact, the current level of discounting is the lowest since February 2015. Discounting levels are lower over the past year in Sydney, Melbourne, Brisbane, Hobart and Canberra.
Dwelling values in Sydney rose by a further 1.0% in January 2017, taking values 2.7% higher over the three months to January 2017 and 16.0% higher over the past year. The 16.0% increase in values over the past year is the most rapid rate of growth since values rose by 16.7% in September 2015. Sydney dwelling values have now increased by 101.1% following their declines throughout 2008. Over the past year, house values have increased at a more rapid rate than units with values increasing by 16.6% and 13.1% respectively. At the end of 2016, the average Sydney dwelling was talking 33 days to sell which was down from 39 days at the end of 2015. Although homes are still selling rapidly, the days on market figure is higher than its recent low of 5 days in July 2015. In January 2017, Sydney gross rental yields remained at historic low levels of 2.8% for houses and 3.8% for units. At the same time last year, yields were recorded at 3.2% for houses and 4.1% for units.
Melbourne dwelling values increased by 0.8% in January, taking values 2.4% higher over the past three months and 11.8% higher over the past year. Melbourne has continued to see the second highest annual rate of value growth of all capital cities over the past year. This has been an ongoing trend of recent years with Melbourne also recording the second-highest rate of value growth since the end of 2008 with values having increased by 86.1%. The significant divergence between growth in house and unit values has persisted over the past year, with house values rising by 12.9% compared to a 2.8% lift in unit values. Melbourne dwellings were taking an average of just 29 days to sell at the end of 2016, which was the city’s shortest time on market on record (records go back to 2005). In January 2017, gross rental yields in Melbourne were recorded at 2.7% for houses and 4.0% for units compared to 2.9% for houses and 4.0% for units in January 2016.
Dwelling value growth in Brisbane has been moderate compared to the two largest capital cities, with values rising 0.1% in January 2017 to be 1.1% higher over the three months to January and 4.4% higher over the past year. Brisbane dwelling values have grown at a rate in excess of inflation or household income growth however; the market has been mired by low growth over recent years. This is highlighted by the fact that following value falls in 2008, Brisbane dwelling values have increased by just 16.5% since the end of 2008. The relative weakness in the housing market is largely being fuelled from the unit market which has seen values fall by -2.7% over the past year compared to a 5.2% rise in house values over the same period. The high volume of new unit stock entering the market is clearly impacting on the growth potential of units. Dwellings were taking longer to sell at the end of 2016 than they were at the end of 2015, with the average days on market figures recorded at 57 days and 43 days respectively. Gross rental yields have fallen over the year for houses from 4.3% to 4.1% while unit yields are unchanged at 5.2%.
Adelaide dwelling values rose by 0.5% in January 2017 to be 1.4% higher over the past three months and 4.8% higher over the past 12 months. Although the annual rate of value growth is higher than it was a year ago, values have only increased at a moderate pace over the past 12 months. Adelaide has seen low rates of value growth for many years now with values having only increased by 14.4% since the end of 2008. House values have increased by 4.9% over the past year which is slightly higher than the 3.7% rise in unit values over the same period. Properties selling in Adelaide are typically taking 43 days to sell which is the same length of time as they were taking a year earlier however, the time on market figure has been falling over recent months. Gross rental yields in Adelaide are currently recorded at 4.0% for houses, down from 4.1% a year ago and at 4.7% for units which have reduced from 4.9% a year ago.
Perth dwelling values rose in January 2017 (+0.2%) and over the three months to January 2017 (+2.1%) however, they are still lower over the past 12 months (-3.2%). On an annual basis, values in Perth have now been falling consistently since June 2015 with values currently -7.7% lower than their end of month peak in December 2014. It has been a sustained period of weak value growth for Perth with values having increased by just 8.6% since the end of 2008. Over the past year both house and unit values have fallen with declines of -3.2% and -3.8% respectively. A Perth dwelling was taking an average of 65 days to sell in December 2016 and although this was longer than the 58 days a year earlier, the average days on market figure has reduced from 73 days in August 2016. The weak rental market has dragged gross rental yields lower over the year to 3.6% for houses and 4.0% for units compared to 3.8% and 4.3% respectively a year earlier.
Dwelling values in Hobart recorded the largest rises of all capital cities in January 2017 (+1.4%) and over the past three months (+5.8%) resulting in a 7.8% increase over the past year. Dwelling values have continued to rise at a fairly rapid pace however; this has come after more than a decade of moderate value rises. Over the ten years to January 2017, Hobart values have increased by a total of just 15.6%. Over the past 12 months, house values have increased by 8.0% which is a slightly higher rate of increase than the 6.3% rise in unit values. The typical dwelling was taking 35 days to sell at the end of 2016 which is substantially lower than the 47 days they were taking at the end of 2015. House rental yields have softened over the past year from 5.1% to 5.0% while unit yields have increased quite significantly from 5.3% to 5.8%.
Darwin was the only capital city to record a fall in values in January, down -1.7%, however, values rose by 1.8% over the three months to January but were -0.7% lower over the past year. Despite some recent monthly rises in values, the Darwin housing market reached an end of month peak in July 2014 and since that time, values have fallen by a cumulative -7.3%. Growth has been soft for many years now with dwelling values reaching a recent peak in mid-2014. The typical Darwin dwelling is taking 86 days to sell currently compared to 74 days a year ago however, the figure has fallen from 110 days in July 2016. Gross rental yields for houses in Darwin have fallen from 5.3% a year ago to 5.0% currently while unit yields are currently at a record low 3.4%, down from 5.1% a year ago.
Dwelling values in Canberra increased by 0.4% in January to be 0.1% higher over the past three months and 6.7% higher over the last 12 months. Although the annual rate of growth slowed from the December 2016 figure, values are still rising at a much faster pace than they have over recent years. Canberra’s housing market has experienced relatively moderate value growth over recent years highlighted by the fact that values are just 33.3% higher since the end of 2008. House values have increased by 6.8% over the past 12 months, outstripping the 5.8% increase in unit values over the same period. Canberra homes are typically taking 37 days to sell currently compared to 47 days at the same time a year ago. Gross rental yields for Canberra units are unchanged over the year at 5.1% while house yields have increased from 4.0% a year ago to 4.1% currently.
Sydney and Melbourne continue to experience the most rapid rates of value growth however; the recent lift in growth for Hobart and Canberra is noticeable. Dwelling values have continued to trend lower over the past year in Perth and Darwin however, the rate of decline has slowed recently as sales volumes have stabilised.
Economic factors continue to have a significant impact on 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 remain above long-run average levels and have been at a heightened level over the past three years. Dwelling approvals have fallen on the back of a substantial slowdown in unit approvals. In December 2016, unit approvals were -31.4% lower than their October 2015 peak and they are -27.1% lower over the past four months.
Recently released building activity data to September 2016 showed that along with dwelling approvals, commencements have already stated to trend lower. So too have the number of dwellings approved for construction but not yet commenced which suggests that confidence in the sector, particularly the high-rise unit sector, is waning. While dwelling commencements have eased, quarterly completions remain at close to historic highs while the number of new dwellings under construction also remains at a historically high level. Given this, although approvals and commencements are falling, there are still many new developments (units in particular) under construction which should result in a heightened volume of dwelling completions throughout 2017. Past 2017 it is expected that dwelling completions will begin to fall.
Mortgage demand has continued to rise as highlighted by the latest housing finance data. While mortgage demand is increasing, it is the investor segment that is currently driving the majority of this growth. In November 2016, there was a total of $33.2 billion worth of housing finance commitments split between $19.9 billion to owner occupiers and $13.3 billion to investors. While the value of lending to owner occupiers has been virtually unchanged for the past five months, lending to investors has continued to climb and is now less than 10% lower than its previous peak. Housing credit data supports this shift showing a steep climb in credit growth to investors over recent months while growth in owner occupier credit has been slowing.
Throughout 2016, the official cash rate was reduced by 25 basis points on two occasions by the Reserve Bank. 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, they reduced which 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 may 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.
Another major economic factor which has supported home values over the past year has been demographic trends. Over the year to June 2016, the national population increased by 1.4% or by 337,799 persons. Of this population increase, 67.7% occurred in New South Wales and Victoria, which would suggest most of the population growth occurred in Sydney and Melbourne, the two largest cities in these two states. Over the year, national net overseas migration was recorded at 182,165 persons, its highest level since June 2014. Of this net migration, 39.1% was to New South Wales and 35.7% was to Victoria. Furthermore, although New South Wales saw a net outflow of 11,349 persons to other states and territories, net interstate migration to Victoria was recorded at an historic high 16,699 persons over the year. The positive population flows into New South Wales and Victoria have resulted in increased demand for housing, particularly within the capital cities which house the majority of the population in each of these states.
Over the coming year, it is anticipated that values will continue to rise although it is expected that the rate of growth will slow. Affordability constraints, particularly in Sydney and Melbourne are likely to become more pressing, particularly if lenders continue to lift interest rates independently of the RBA. The ongoing value growth has made the deposit hurdle greater along with agent commissions and stamp duty expenses. Furthermore, many home owners have already purchased throughout the current growth phase and with such high entry and exit costs it makes little sense for homeowners to be buying and selling regularly. As values continue to rise, the supervisory focus from APRA and risk committees can only be expected to increase this year, likely leading to tighter credit policies.
There is already a divergence between the performance of houses and units in terms of value growth across some of the major capital cities. Throughout 2017 as more unit stock enters the market it is anticipated that the divergence between the value growth performance of houses and units will increase.
In Sydney and Melbourne, values are expected to increase further this year however; the rate of growth is likely to slow, largely due to the factors previously mentioned. What we will likely see in these two cities is a further divergence between the growth in house and unit values. In Brisbane growth looks set to remain moderate however, with more people migrating to Queensland this may result in increased demand and some acceleration in growth, particularly if employment growth picks up in the state. It looks like more of the same in Adelaide with moderate growth forecast again in 2017. Although recent indicators suggest that the market may be stabilising in Perth and Darwin we expect weak conditions again in 2017 albeit they may not be quite as weak as over recent years. Hobart growth has accelerated over the past year and we expect reasonably strong growth in values again in 2017. Canberra has seen value growth lift over the past year and with improving economic conditions and a tightly managed supply of new housing it may actually see an acceleration in value growth throughout 2017.