November Market Outlook
Cameron Kusher, CoreLogic Research Analyst
The CoreLogic Home Value Index showed that in October 2016, combined capital city home values rose by 0.5%. CoreLogic estimates that as at the end of October 2016, the total value of residential property nationally was $6.7 trillion. Adelaide and Hobart were the only capital cities in which values fell in October. Over the three months to October 2016 combined capital city home values increased by 2.7%. Over the three month period, home values fell in Adelaide, Perth and Hobart and rose elsewhere with significant increases in Canberra (+5.6%) and Melbourne (+4.6%).
Combined capital city home values have increased by 9.1% over the first 10 months of this year compared to a slightly higher 9.5% increase over the same period in 2015. Perth and Darwin are the only two cities in which home values are lower over the first 10 months of this year.
Home values across the combined capital cities have increased by 7.5% over the 12 months to October 2016. The annual rate of growth is trending higher and is now rising at its fastest pace since June 2016. Although value growth is accelerating, it remains much lower than its most recent peak of 11.1% in July 2015. Annual growth is also slower than 10.1% at the same time a year ago.
Perth and Darwin are the only capital cities in which values have fallen over the past year, down -3.7% and -3.8% respectively. Although values have increased across all other capital cities, the 10.6% increase in Sydney, the 9.1% rise in Melbourne and the 7.9% increase in Canberra are greater than the growth across the capital city benchmark. Across the remaining capital cities values have increased over the year, up 4.1% in Brisbane, 2.5% in Adelaide and 5.0% in Hobart.
The annual growth in unit values has continued to lag behind growth in detached houses. Over the past 12 months, combined capital city house values have increased by 7.7% compared to a 6.3% rise in unit values. Annual growth in house values has outstripped growth for units in all cities except Perth, Hobart and Darwin. In Brisbane, Adelaide and Canberra the annual change in house values is more than two times greater than the change in unit values. In a number of the capital cities, a record level of new unit construction and completions is likely weighing on unit prices, with substantially more new units in the pipeline we would expect the underperformance relative to houses to continue.
Gross rental yields were steady in October recorded at 3.1% for combined capital city houses and 4.1% for units. Although there was no change over the month, the surge in values and stalling rental, growth has pushed gross rental yields to historic low levels. In all cities except for Hobart where they are unchanged, gross rental yields have fallen over the past 12 months. With value growth continuing to outstrip rental market we would expect gross rental yields to soften further over the coming months.
Across the combined capital cities there were 31,264 unique new properties listed for sale over the past 28 days. While new listings have continued to trend higher throughout spring, they are currently -4.1% lower than they were 12 months ago. New listings are lower than they were a year ago in: Sydney (-16.5%), Melbourne (-4.6%), Adelaide (-1.0%), Hobart (-12.8%) and Darwin (-15.5%). New listings are currently higher than they were a year ago in Brisbane (+8.2%), Perth (+11.8%) and Canberra (+0.3%). In Perth in particular this is a concern given that values are falling and we are seeing more new stock becoming available for sale. In terms of unique total listings (new and existing listings), there were 109,814 listings over the past 28 days across the combined capital cities which was 2.0% higher than a year ago. Total listings were lower over the year in Sydney (-9.6%), Melbourne (-0.8%), Hobart (-31.7%) and Canberra (-15.0%) and they were higher in Brisbane (+10.0%), Adelaide (+3.4%), Perth (+18.5%) and Darwin (+2.8%).
Homes were selling the quickest they have in almost a year in September. Over the month, the typical capital city home was taking 39 days to sell compared to 36 days at the same time a year ago. Compared to September 2015, homes were selling quicker in Melbourne, Hobart, Darwin and Canberra and they were taking longer to sell elsewhere. Across homes that are being discounted from their initial listing price, the level of discounting is lower than it was a year ago, In September 2015, the typical discount was recorded at 6.0% compared to a typical discount of 5.7% in September of this year. Discounting levels are higher over the year in Adelaide, Perth and Hobart but are lower elsewhere.
Auction clearance rates have strengthened over recent weeks however, the volume of properties going to auction is well down on the same time last year. In Melbourne, auction clearance rates have consistently been above 70% since early July while in Sydney clearance rates have been consistently above 75% since late July. The latest final clearance rates for both Melbourne and Sydney were above 80% whereas a year ago clearance rates were recorded at 69.7% and 61.2% respectively. A major contributor to the strengthening clearance rates has been fewer auctions. So far this year, Melbourne auction volumes are -11.1% lower than a year ago while in Sydney auction volumes are -25.7% lower. Fewer auctions being held results in less choice and more competition, subsequently it also appears to be resulting in much higher auction clearance rates.
Home values in Sydney increased by 2.9% over the three months to October 2016 to be 13.5% higher over the first 10 months of 2016. Over the first 10 months of last year Sydney dwelling values were 14.4% higher. Sydney home values have increased by 10.6% over the past year which is the greatest annual increase amongst all capital cities albeit growth has slowed from its peak of 18.4% over the year to July 2015. House values have increased by 10.9% over the past 12 months compared to 9.1% increase in unit values, the gap in growth between houses and units is much narrower than in Melbourne and Brisbane. While value growth remains robust, rental growth has slowed which has pushed rental yields lower. In October 2016, gross rental yields were recorded at 2.8% for houses and 3.8% for units compared to 3.1% and 4.1% respectively a year earlier. The typical Sydney home is currently taking 32 days to sell compared to 27 days at the same time a year ago.
Melbourne dwelling values have increased by 4.6% over the three months to October 2016 and are 11.9% higher over the first 10 months of 2016. Over the first 10 months of 2015, Melbourne home values increased by a higher 14.0%. Home values have increased by 9.1% over the past 12 months which although remains quite strong, it has slowed from its recent peak of 14.2% in September of last year. The value of houses has increased at a faster pace than units over the past year, with the two property types increasing by 9.6% and 5.2% respectively. Gross rental yields were unchanged over the month, remaining at their historic low levels of 2.8% for houses and 4.0% for units however, a year ago they were slightly higher at 2.9% for houses and 4.1% for units. Homes in Melbourne are currently selling fractionally quicker than they were a year ago, currently taking 31 days compared to 32 days at the same time a year ago.
Dwelling values in Brisbane rose 0.8% in October to be 1.3% higher over the three months to October 2016. Over the first 10 months of 2016, dwelling values have recorded a moderate 2.6% increase which is equivalent to the increase over the same period last year. Over the past 12 months dwelling values have recorded a 4.1% increase which has eclipsed the 3.8% increase over the same period in 2015. The value growth is being driven by detached houses which have seen values rise by 4.7% over the year compared to a -1.4% fall across unit values. Gross rental yields were unchanged over the month however, they have softened for both houses and units over the past year. 12 months ago gross rental yields were recorded at 4.3% for houses and 5.3% for units compared to their current 4.1% for houses and 5.2% for units. Homes in Brisbane are remaining on the market for an average of 57 days currently which is higher than the 43 days at the same time a year ago.
In Adelaide, dwelling values fell -2.4% in October to be -1.3% lower over the three months to October 2016. Growth in Adelaide remains moderate with values rising by 3.3% over the first 10 months of this year and by 2.5% over the past 12 months. In comparison, over the first 10 months of 2015, Adelaide home values rose by 0.7% and over the 12 months to October 2015 they were 2.3% higher. House values have increased by 2.7% over the past 12 months while unit values have fallen by -0.3%. Gross rental yields were recorded at 4.0% for houses and 4.7% for units in October 2016 compared to 4.1% and 4.7% 12 months earlier. Adelaide homes are currently taking slightly longer to sell than they were a year ago, with days on market recorded at an average of 55 days compared to 50 days a year earlier.
Home values in Perth increased by 0.8% in October however, they were -1.5% lower over the three months to October 2016. Perth home values have fallen by -6.2% over the first 10 months of this year, are -3.7% lower over the past 12 months and are now -9.7% lower than their end of month peak in December 2014. Both houses and units have recorded value falls over the past 12 months with the decline in houses (-3.7%) slightly greater than units (-3.3%). Perth rents are falling at a more rapid pace than values which has dragged gross rental yields lower. In October 2015, gross rental yields were recorded at 4.0% for houses and 4.4% for units compared to 3.7% and 4.2% respectively in October of this year. As the housing market has weakened, homes have taken longer to shift and currently take an average of 79 days to sell, up from 67 days a year ago.
Hobart dwelling values fell by -2.1% in October 2016 and were -2.8% lower over the three months to October. Although values have recently fallen, they are 6.7% higher over the first 10 months of the year and 5.0% higher over the past 12 months. Over the same period last year, dwelling values were just 0.9% higher over the first 10 months of 2015 and were 3.8% higher over the 12 months to October 2015. Over the past 12 months, house values have increased at almost double the rate (8.3%) of house values (4.7%). Hobart currently has the nation’s highest capital city gross rental yields at 5.3% for houses and 5.6% for units and house yields are unchanged over the year while unit yields have firmed from 5.3% a year ago. Hobart homes are selling slightly quicker than they were a year ago, currently taking 52 days to sell compared to 59 days a year ago.
In Darwin, dwelling values have increased by 2.2% in October to be 4.0% higher over the past three months. Although there has been a recent increase in values, longer-term the market remains weak with values 2.6% lower over the first 10 months of the year and -3.8% lower over the past 12 months. Darwin dwelling values are now -9.2% lower than they were at their recent end of month peak in May 2014. Darwin dwelling values have been dragged lower by a -6.6% fall in house values over the year while the unit markets have been more volatile. Gross rental yields in Darwin have fallen heavily over recent years with rents declining at a much faster pace than values. Gross rental yields are currently recorded at 5.0% for houses and 4.1% for units compared to 5.2% and 6.1% respectively a year ago. Although homes continue to take a long time to sell they are currently selling after an average of 71 days which is quicker than the 89 days a year ago.
Canberra dwelling values increased by 0.4% in October to be 5.6% higher over the three months to October. Canberra’s housing market is clearly seeing increasing demand driving values higher given they are up 9.6% over the first 10 months of 2016 and 7.9% higher over the past year. At the same time last year, Canberra home values had only increased by 4.5%. The growth in values over the past 12 months has largely been driven by houses with values up 8.2% compared to a more moderate 3.2% increase in unit values. Gross rental yields are unchanged over the year, recorded at 4.0% for houses and 5.1% for units. Homes are selling quicker than they were a year ago, further highlighting the strengthening market, they are currently taking 35 days to sell compared to 44 days a year ago.
The growth trend in Sydney and Melbourne remains strong. Although the annual rate of value growth is slower than it was 12 months ago, the rate of growth is starting to escalate again. Canberra’s housing market is seeing its rate of growth accelerate and Hobart has also seen a recent uplift and growth. Brisbane and Adelaide are seeing slow and steady rates of growth while Perth and Darwin are recording values which are much lower than their peak. This shows that headline figures are being heavily influenced by Sydney and Melbourne but outside of those cities growth conditions are generally nowhere near as strong.
The ongoing strength of Sydney and Melbourne and relatively weak growth elsewhere is being driven by a number of factors. Population growth has slowed nationally however, it has remained fairly steady in New South Wales and Victoria with overseas and interstate migration actually picking up in each of those states. Over the past five years, almost two thirds of all jobs created nationally were created in Sydney and Melbourne. Not only do these job opportunities attract more people to these cities but a stronger employment market also increases people’s capacity to borrow, particularly for housing. With low interest rates and subsequent low returns, the capital growth alone in Sydney and Melbourne has been attractive to investors and has encourage higher levels of housing investment over recent years. Outside of Sydney and Melbourne these trends have not been prevalent and it has been to the detriment of housing market demand and ultimately it has resulted in much more moderate value growth and in some instances value falls.
While the previously mentioned factors remain for Sydney and Melbourne, stretched affordability, imbalance between rents and dwelling values and constantly increasing market entry and exit costs are expected to eventually cause the market to slow. Notwithstanding the large supply response currently underway, albeit much of this supply is units rather than detached houses. We are expecting Sydney and Melbourne value growth will remain strong for the remainder of 2016 and will probably start to slow throughout 2017 as more supply enters the market.
Another factor that may cause a cooling of housing market conditions is the ongoing evolution in lending policies by mortgage lenders. Every few weeks we are hearing about lenders tweaking their policies and we expect that we will see more of this over the coming months. The RBA has already noted that supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments. By no means is the work here done and the RBA is already noting values are rising again in certain markets so we may see further adjustments over the coming months, especially if value rises continue to escalate.
While there is an expectation that Sydney and Melbourne’s housing markets will cool over the next year or so, it seems unlikely that value declines across these markets are imminent. It also seems unlikely that other capital cities will see rates of growth escalate to the levels recently seen in Sydney and Melbourne. Although housing is much more affordable outside of Sydney and Melbourne, the continued absence of any significant improvement in economic conditions is anticipated to continue to curtail any significant and sustainable uplift in value growth. The exception at the moment is the Canberra housing market where improved economic conditions have pushed the pace of capital gains higher.