September Market Outlook

The Smartline Report – September 2016 Edition

September Market Outlook

Cameron Kusher, CoreLogic Research Analyst

September 2016

Over the month of August 2016, combined capital city home values have increased by 1.1% according to the CoreLogic Home Value Index. At the end of August the total value of residential property nationwide was estimated at $6.7 trillion. Over the month, home values increased in all capital cities except Adelaide and Hobart. Over the three months to August 2016, combined capital city home values have increased by 2.4% with increases of more than 3% in Sydney and Melbourne highlighting the ongoing strength in these two cities. Over the past three months home values are lower in Brisbane, Adelaide, Perth and Darwin.

Over the first eight months of this year, combined capital city home values have increased by 7.5% with increases recorded across all cities except for Perth and Darwin. So far this year, home values have increased by more than 5% in: Sydney (11.9%), Melbourne (8.6%), Hobart (8.8%) and Canberra (6.6%).

Combined capital city home values have risen by 7.0% over the 12 months to August 2016. The annual rate of growth has accelerated a little over the past month however, it is down from its most recent peak of 11.1% in July 2015.

Sydney and Melbourne have continued to record the largest annual rises in home values over the past 12 months, up 9.4% and 9.1% respectively. Although growth remains strong in both of these cities it has slowed from recent peaks. In Sydney, value growth peaked at 18.4% in July 2015, with values now growing at less than half that pace. Melbourne value growth peaked at 14.2% in September 2015 and has since slowed. Across the remaining capital cities, home values are higher over the past year in Brisbane (+4.4%), Adelaide (+3.1%), Hobart (+6.5%) and Canberra (+7.6%). The annual rate of value growth in Hobart is the highest it has been since July 2010 and in Canberra it is the highest rate of growth since October 2010. Home values in Perth and Darwin have each fallen by -4.2% over the past year. Perth home values have been trending lower since December 2014 and Darwin values have been lower since July 2014.

Over the past year, house values across the combined capital cities have recorded a greater rate of growth than unit values. House values have increased by 7.2% compared to a 5.5% rise in unit values. Hobart and Darwin are the only capital cities in which the change in unit values has been greater over the year than the change in house values. In Melbourne, Brisbane, Adelaide and Canberra unit values are increasing at an annual rate which is less than half that of the rate of growth for houses. With a record pipeline of units under construction we would expect that growth in unit values will continue to underperform that of houses for the foreseeable future.

Rental rates across the capital cities continue to show weakness, having fallen by -0.5% over the past 12 months. In terms of the individual capital cities, rental rates are lower than they were a year ago in Brisbane, Adelaide, Perth and Darwin, they are unchanged in Sydney and have shown a modest rise in Melbourne, Hobart and Canberra. Interestingly, in Melbourne, Hobart and Canberra the annual rate of rental growth is now stronger than it was 12 months ago. With value growth generally stronger than rental growth, gross rental yields have softened over the year and are currently recorded at 3.3% across the combined capital cities compared to 3.5% a year ago.

The amount of new stock being advertised for sale has started to increase in the lead-up to Spring but remains lower than it was a year ago. Across the combined capital cities, there was 24,791 unique newly advertised properties available for sale over the past four weeks and 100,828 total properties advertised for sale. The number of properties new to the market is -6.8% lower than it was a year ago while total listings were 3.6% higher than a year ago. The data indicates that some stock which has been advertised for sale for some time is proving hard to sell while at the same time there is a relatively low volume of new stock being advertised for sale. The low volume of fresh stock for sale is particularly apparent in Sydney and Melbourne where new listings are -20.9% and -7.8% lower than they were a year ago respectively. As Spring progresses it will be interesting to see how much new listings increase and how the market responds to a likely increase in homes available for sale. The low level of new stock becoming available for sale appears to have been a key driver of the ongoing strength in the Sydney and Melbourne housing markets over recent months.

The latest data for the average number of days a home takes to sell shows that in July 2016 it typically took 48 days to sell a home up from 40 days at the same time last year. This is probably a reflection of the mounting total listings previously mentioned with older stock taking much longer to sell while well priced new stock is selling relatively quickly. Across the capital cities, homes are taking longer to sell than they did a year ago in all cities except for Adelaide, Hobart and Canberra. The average level of discounting by vendors selling for lower than the initial advertised price has also increased over the year from 5.9% to 6.1%. Discounting levels are lower than a year ago in Sydney, Melbourne, Brisbane and Canberra but higher elsewhere.

Auction clearance rates across the combined capital cities have been recorded above 70% for five successive weeks, indicating strong demand at auctions and ongoing value growth particularly in the main auction cities of Sydney and Melbourne. While clearance rates are strong, auction volumes are much lower than they were a year ago, reflecting the low volume of new listings in Sydney and Melbourne. Over the year to-date, there have been 9.6% fewer auctions than over the same period last year in Melbourne and 26.8% fewer auctions in Sydney. In Sydney, auction clearance rates have been above 70% for 19 successive weeks and in Melbourne they have been above that level for eight successive weeks.

Home values across Sydney have increased by 3.9% over the three months to August, are 11.9% higher so far this year and are 9.4% higher than they were 12 months ago. The 9.4% increase in home values is the largest of all capital cities however, it is substantially lower than the peak rate of annual growth recorded at 18.4% in July 2015. Houses have recorded a slightly higher rate of growth over the past year than units, with values rising by 9.6% and 8.3% respectively. The Sydney rental market has slowed substantially over the past year with house rents falling -0.5% and unit rents rising 1.8%. Overall, rents are unchanged over the past year which is the weakest rental conditions on record. With no rental growth and ongoing strong increases in home values gross rental yields are at record lows. A year ago, gross rental yields sat at 3.1% for houses and 4.1% for units compared to their current levels of 2.8% for houses and 3.9% for units.

Melbourne dwelling values have increased by 3.4% over the three months to August, are up 8.6% so far this year and have risen by 9.1% over the past 12 months. Although the 9.1% annual increase remains strong, it has eased back from the peak rate of growth of 14.2% over the year to September 2015. House values have increased by 9.7% over the past 12 months which is more than double the 4.1% increase in unit values. With the number of units under construction at a record-high we would expect unit value growth to continue to underperform that of houses. Rental growth in Melbourne is actually a little stronger than it was a year ago but is much lower than home value growth which is forcing gross rental yields lower. House rents have increased by 2.5% over the past year while unit rents have increased by 1.3%. Gross rental yields are currently recorded at record lows of 2.8% for houses and 4.0% for units, down from 3.0% and 4.1% respectively a year ago.

Brisbane home values have fallen by -0.5% over the past three months, are 1.7% higher over the first eight months of this year and are 4.4% higher over the past 12 months. The Brisbane housing market continues to see only moderate value growth despite being much more affordable than Sydney and Melbourne. The comparatively weak Queensland economy is probably the biggest factor in the cities relative underperformance. House values have increased by 4.9% over the past 12 months while unit values have fallen by -0.4% showing divergent growth performances. Value growth has outpaced the change in rents over the past year, which have fallen by -0.9% for houses and are -2.5% lower for units. As a result, gross rental yields have fallen to 4.1% for houses and 5.2% for units. At the same time a year ago, rental yields were recorded at 4.4% for houses and 5.4% for units.

Dwelling values in Adelaide have fallen by -0.8% over the past three months, are 3.7% higher in 2016 and have increased by 3.1% over the past 12 months. The comparatively weak local economy is likely to be contributing to the moderate overall value growth. Over the past 12 months, house values have increased by 3.3% which is a much higher rate of growth than the 0.8% increase in unit values. Although home values have continued to rise over the year, rental rates have declined down -0.3% for houses and -1.0% for units. Gross rental yields are little changed over the year due to only moderate value growth and modest rental falls. In August 2015, gross rental yields were recorded at 4.1% for houses and 4.7% for units compared to 4.0% for houses and 4.7% for units currently.

Perth home values have fallen by -1.5% over the three months to August, are -4.6% lower so far in 2016 and have fallen by -4.2% over the past year. Since Perth home values reached their end of month peak in December 2014, they have fallen by -8.1%. Both houses and units have recorded value falls over the past year with house values down -4.2% and unit values -5.0% lower. Although home value falls are significant, rental rates have fallen at a more rapid pace over the year resulting in softening of gross rental yields. House rents have fallen by -9.5% over the past year, pushing gross rental yields lower from 3.9% a year ago to 3.7% currently. Unit rents have fallen by -8.4% over the past year taking gross rental yields from 4.5% a year ago to 4.4% currently.

Dwelling values across Hobart have increased by 2.0% over the past 3 months, are 8.8% higher so far this year and have increased by 6.5% over the past 12 months. The current annual rate of value growth is the highest it has been since July 2010. Over the past year, house values have increased by 5.5% while the much smaller unit market has seen values increase by 16.3%. Hobart has the highest yields of any capital city at 5.2% for houses and 5.4% for units. A year ago, gross rental yields were recorded at 5.2% for houses and 5.5% for units. Hobart is one of the few capital cities in which rental growth has accelerated over the past year with house rents up 6.0% and unit rents 14.3% higher.

Darwin home values have fallen by -3.9% over the three months to August 2016, are -2.5% lower over the first eight months of this year and are -4.2% lower over the past year. Darwin home values have now declined by -9.1% from their end of month peak in May 2014. House values have recorded slightly larger annual falls than unit values, with values falling by -4.4% and -3.1% respectively. While home values have fallen, rental declines have been significantly greater over the past year, down -10.8% for houses and -27.9% for units. As a result of these substantial rental falls, yields have compressed. In August 2015, gross rental yields were recorded at 5.5% for houses and units compared to 5.2% for houses and 4.1% for units currently.

Over the three months to August 2016 Canberra home values have increased by 1.0%, they are 6.6% higher over the first eight months of this year and 7.6% higher than they were 12 months ago. The city is seeing a big discrepancy in growth conditions between houses and units with house values increasing by 8.3% over the past year compared to a -1.6% decline in unit values. Rental growth has accelerated over the past year, recording increases of 2.7% for houses and 2.2% for units. Gross rental yields have shifted over the past year with house yields improving and unit yields falling. 12 months ago, gross rental yields for houses were 4.1% for houses and 4.9% for units compared to the current readings of 3.9% for houses and 5.1% for units.

Overall, the rate of home value growth has slowed from recent peaks however, the two largest capital city markets have continued to see a strong rate of value growth.

The most recent cut to interest rates seems unlikely to significantly re-inflate home value growth however, it also seems unlikely that a slowing of growth is imminent either. Although housing finance demand is slowing, affordability is stretched, lending criteria is tighter and supply is increasing, there is still a relatively low volume of stock being listed for sale which will to some extent offset these factors. Spring will provide the real test for the market, particularly given that new listings are expected to rise over this period but to what magnitude remains to be seen.

The housing market’s performance remains diverse with growth drivers and performance differing across each market. Sydney and Melbourne remain relatively sheltered from the mining downturn and are enjoying much stronger overall economic conditions compared to the other states and territories. This is resulting in a strong inflow of residents from both overseas and interstate. On the other hand, mining states and territories are feeling the full brunt of the mining downturn, with much weaker economic conditions impacting the housing market. In the other state and territories, economic conditions are stable but job creation is relatively weak and overall economic conditions are such that despite much better housing affordability than Sydney and Melbourne they are unable to lure residents away from these much stronger economies.

Lenders have certainly tightened their lending policies over the past 18 months. During this time we have seen many changes including limits on growth in overall credit to investors, increased serviceability limits and tighter lending policies for borrowers who earn their income offshore. This has particularly impacted on the investment segment of the market which has seen a dramatic slowdown in overall credit growth as well as new lending. Over the past few months, lending to investors has begun to lift and it will be interesting to see how much further this can run. Although gross rental yields are at historic lows, they remain higher than rates for cash deposits and are quite attractive when you factor in the growth in home values as well as the yield.

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. However, the low volume of housing stock available for sale and lower interest rates may continue to drive growth in the market for a while longer. Throughout next year we would expect the rate of growth in Sydney and Melbourne to slow and we are already seeing growth in values pick-up in Hobart and Canberra, while Brisbane may also join that list. These markets are unlikely to see growth accelerate to the levels recently seen in Sydney and Melbourne especially when you consider how much weaker these economies are relative to Sydney and Melbourne. Other cities will need to offer a compelling investment opportunity or decent and sustainable employment opportunities to result in any significant acceleration in home value growth. The moderate value growth in Adelaide is likely to continue but as the car manufacturing sector closes down next year it could create headwinds for the market. The declines in the Perth and Darwin housing markets look set to continue however, we could start to see people buying for the long-term re-entering these markets over the next year as values fall and buyers look to pick up properties at significant discounts from their previous prices.

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