housing market outlook

The Smartline Report – June Edition

Housing market outlook

Cameron Kusher, Senior Research Analyst, CoreLogic RP Data
June 2015

The CoreLogic RP Data Home Value Index showed that combined capital city home values fell by -0.9% in May 2015.

Housing market

It was the first monthly fall in the index since November of last year and the falls were widespread with only Darwin and Canberra avoiding the declines. Although home values fell over the month, other indicators of the market show conditions remain strong and we fully expect that values will revert to showing growth again in June.

Over the first five months of this year, combined capital city home values have increased by 2.9%.  In comparison, after the first five months of last year, home values were up a lower 1.9%. Home values have risen so far this year in Sydney (6.2%), Melbourne (2.5%), Adelaide (0.5%), Darwin (1.3%) and Canberra (4.0%) and fallen in Brisbane (-0.8%), Perth (-2.6%) and Hobart (-0.3%).

Over the 12 months to May 2015, combined capital city home values have increased by 9.0% which remains below the recent peak in annual growth of 11.5% over the 12 months to April 2014.  Although the rate of growth is much lower than the recent peak, the 9.0% annual rise is the fastest rate of annual growth since September 2014.

Another interesting trend to note is the significant difference between the capital growth performances for houses relative to units. At a combined capital city level, house values have increased by 9.6% over the past year compared to a 5.3% increase in unit values. Across each city annual growth in house values is greater than growth for units. With units now accounting for more than half of all capital city dwelling approvals it is likely that the influx of new unit stock is impacting on growth for this product type.

Since the 25 basis points cut to official interest rates in February, auction clearance rates have jumped, particularly in Sydney and Melbourne, suggesting a positive response to the stimulus of lower mortgage rates across these cities. In fact, every week since the rate cut Sydney has recorded an auction clearance rate above 80% while in Melbourne clearance rates have moved from the mid-60% range to the high 70% range. Following the second rate cut at the beginning of May, auction clearance rates have remained high in the two major markets although they have eased slightly from their recent peaks.

Private treaty metrics also point to strong capital growth conditions, with the level of vendor discounting at 5.6% in April 2015 having shown little change over the past year and a half.  Meanwhile the average selling time was recorded at 39 days in April which reflects a rapid rate of sale and at a similar level to the same time a year ago.

The number of properties available for sale is also tight at the moment. Across the combined capital cities, the number of new listings being added to the market is -6.8% lower than a year ago while total listings are -7.5% lower.

Rental market

While home values are increasing at a fairly rapid rate, the same can’t be said for rental rates.  Our rental data is available from the end of 1995 and the annual rate of rental growth across the combined capital cities has never been lower than it currently is. Over the 12 months to May 2015, combined capital city rental rates have increased by 1.5%.  Hobart (3.5%) and Sydney (3.1%) are the only cities in which rents have increased by more than 2.5% over the past year.  Rental rates have actually fallen over the past year in Perth (-4.5%), Darwin (-5.5%) and Canberra (-0.6%).  With new housing supply continuing to rise and investor purchasing activity at record highs it is reasonable to expect that rental growth will most likely slow further over the coming months.

Most capital cities are still seeing dwelling values rise at a substantially higher rate than rents which is causing a consistent compression of rental yields.  The lowest gross rental yields can be found in the cities where dwelling values have grown the most; Sydney where the typical home is providing a gross yield of 3.6% and Melbourne where gross yields are slightly lower at 3.3%.  The highest yields are still in Darwin (5.6%) and also Hobart (5.4%).

Outlook

Relatively low consumer confidence, stricter serviceability requirements for borrowers, tighter lending conditions for investors, affordability challenges and low rental yields are all factors that may contribute to the moderation in housing market conditions over 2015.

These factors could be somewhat offset by the low returns from risk free assets and interest rates for residential mortgages expected to reduce even further over the coming months. The ideal outcome for the Reserve Bank under the current and potentially lower interest rate setting would be that housing market conditions moderate back to more sustainable levels, but housing demand remains strong enough to keep dwelling construction at the current high levels and new home sales relatively high.  The recent rebound in the annual rate of home value growth in Sydney is no doubt likely to be creating some headaches for both the RBA and APRA.

www.smartline.com.au

Please note that information in this publication is subject to change without notice. Smartline assumes no responsibility for any errors, omissions or mistakes in this document. © Smartline Home Loans P/L 1999 – 2015. Australian Credit Licence Number 385325

 

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