September Market Outlook

September Outlook

Cameron Kusher, CoreLogic Research Analyst

September 2017

CoreLogic released an upgrade to its Hedonic Home Value Index methodology in September 2017. According to the revised index, national dwelling values were unchanged over the month with combined capital city dwelling values increasing 0.1% and combined regional market values -0.2% lower. Across the individual capital cities, values were unchanged in Sydney, lower in Perth and Darwin, and higher elsewhere.

Over the three months to August 2017, national dwelling values were 0.5% higher due to a 0.6% increase in combined capital city values while combined regional market values fell by -0.1%. Perth (-1.6%) and Darwin (-4.7%) recorded value falls. Elsewhere, values rose over the quarter with rises recorded of +0.3% in Sydney, +1.9% in Melbourne, +0.2% in Brisbane and Adelaide, +1.9% in Hobart and +0.4% in Canberra.

Nationally, dwelling values increased by 8.9% over the 12 months to August 2017, which was their slowest annual rate of growth since February of this year. Combined capital city dwelling values increased by 9.7% over the year, while combined regional market values were 5.8% higher. Sydney (+13.0%), Melbourne (+12.7%) and Hobart (+13.6%) all recorded double-digit value growth over the year. Values have also increased over the year in: Brisbane (+3.0%), Adelaide (+5.2%) and Canberra (+8.0%). The ongoing weakness in the Perth and Darwin housing markets is reflected in their annual figures with values -2.8% and -4.2% lower respectively.

The annual growth in units has continued to lag behind that of houses over the past year with house values 9.4% higher compared to a 7.5% increase in unit values. It was a similar story across both the combined capitals and the combined regional markets, where house values are 10.3% and 6.1% higher respectively for houses, and 7.9% and 4.7% higher for units. Across each individual capital city market the annual change for houses has outstripped the annual change for units. For houses, these annual changes have been recorded at: +13.7% in Sydney, +13.8% in Melbourne, +4.3% in Brisbane, +5.8% in Adelaide, -2.7% in Perth, +14.0% in Hobart, +1.2% in Darwin and +9.8% in Canberra. For units the annual changes have been recorded at +11.2% in Sydney, +9.3% in Melbourne, -3.2% in Brisbane, +1.1% in Adelaide, -3.5% in Perth, +11.7% in Hobart, -13.5% in Darwin and +2.8% in Canberra, In Brisbane, Adelaide and Canberra, in particular, there has been a fairly substantial difference between the growth performance of houses and units over the past year.

In general, values have continued to grow at a faster pace than rents, which has pushed gross rental yields lower. Gross rental yields now sit at historic lows of 3.62% nationally, and 3.31% across the combined capitals. Across the combined regional housing markets yields are recorded at 4.69% which is well above the historic low of 4.48%. Of course, a number of factors have pushed yields lower, including the rapid growth in dwelling values, historically low mortgage rates and the recent historic high level of investor housing finance commitments. Sydney (3.04%) and Melbourne (2.93%) are the two cities in which investor activity has been highest over the past few years, and are the only two cities with record low rental yields. Across all other capital cities gross rental yields have softened over the past year; however, they remain higher than their historic lows. Across the remaining capitals, gross rental yields are recorded at 4.38% in Brisbane, 4.21% in Adelaide, 3.96% in Perth, 5.11% in Hobart, 5.60% in Darwin and 4.4% in Canberra. The data indicates that investors have overwhelmingly (and quite successfully) chased capital growth in markets like Sydney and Melbourne. While this has been the case, with a mature growth cycle and higher mortgage rates for investors, we may see this segment of the market increasingly focusing on rental returns as well as capital growth potential going forward.

At a national level, the number of new properties advertised for sale, as well as the total number of properties advertised for sale, is lower than at the same time last year; however, across the individual capital cities the trends are in some instances markedly different. Growth in dwelling values across Sydney has slowed recently and a factor behind this slowing appears to be the volume of stock advertised for sale. New listings are 9.6% higher than they were a year ago, total listings are 16.4% up on a year ago, and both new and total listings are at their highest level for this time of year since 2013. By comparison, Melbourne’s new and total listings are only marginally higher than a year ago, up 2.5% and 0.3% respectively. Darwin is the only other capital city in which new listings are higher than a year ago (+13.0%), while new listings are substantially lower than a year ago in Perth (-14.3%) and Hobart (-10.9%). Total listings are also well down on a year ago in Perth (-12.7%) and Hobart
(-32.0%), and are unchanged in Darwin. Elsewhere outside of Sydney and Melbourne, total listings are only moderately higher than a year ago.

During the past month, the Australian Prudential Regulation Authority (APRA) released its quarterly data on property exposures by authorised deposit-taking institutions (ADIs). The data showed that over the quarter, the value of new interest-only lending fell by -7.0%, with interest-only mortgages falling from 36.2% of all mortgages over the March quarter to 30.5% over the June quarter. By the end of the September 2017 quarter, interest-only mortgage lending needs to be below 30% of new originations by ADIs. The data also highlights an ongoing reduction in mortgages with a loan-to-value ratio (LVR) of more than 90%. Over the quarter, $6.831 billion in mortgages settled had an LVR greater than 90%, which was the lowest value since the March 2011 quarter. It also means that mortgages with an LVR of more than 90% accounted for 6.9% of mortgages written over the quarter which was the lowest proportion on record. The data is highlighting that banks are increasingly less inclined to write higher risk mortgages, along with the fact that investors are facing progressively higher mortgage rate premiums; the differential now typically sits at a premium of around 60 basis points relative to owner occupiers (higher for mortgages on interest-only terms).

At a national level, the rate of dwelling value growth is slowing and this is generally being reflected across both capital city and regional housing markets. Should this trend continue, it is likely to be a very welcome development for policy makers such as the RBA and APRA. CoreLogic is expecting slower growth conditions to continue throughout the remainder of 2017; in particular, this could lead to the start of some moderate declines in values in Sydney. Going forward, the combination of more stock for sale, the rationing of credit to investors – who have been extremely active in Sydney – and the lack of affordable housing is likely to impact on growth. While the rate of growth is slowing in Melbourne, it is not anticipated to be as affected as Sydney due to much more affordable housing and less investor activity. Brisbane and Adelaide have continued to see quite moderate growth; however, with migration lifting into south-east Queensland this may lead to a rise in the rate of value growth. Perth and Darwin have continued to see values fall. Perth looks as if it is closer to a market bottom than Darwin; however, sales volumes have increased across both cities. While Perth is seeing an ongoing fall in stock on the market, which looks encouraging for a slowing of value fall, Darwin unfortunately continues to see heightened levels of new stock hitting the market, which could create further downward pressure on values. Hobart and Canberra are the two cities in which value growth has accelerated noticeably over the past year. Each of these cities is seeing relatively low stock available for sale and improving local economies, which is driving more housing demand. Hobart in particular is also benefiting from being a significantly more affordable location to purchase a home than all other capital cities, which is likely contributing to its capital city-leading rate of value growth over the past year.

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