Property market passes peak growth phase
After two years of strong values growth across Australia’s property market, symptoms are emerging that the market has moved through its peak growth phase.
An analysis of recently released housing finance data by the Australian Bureau of Statistics (ABS) confirmed that the value of investment finance commitments was at a record high and revealed a 2.3% increase for the month of April, while year-on-year it increased by 29.8%.
The ABS data shows that investors committed to $11 billion worth of housing finance over the month, accounting for 39.4% of all housing finance or 47.8% when refinances are excluded.
With the proportion of lending to investors at near-to record highs, banking sector regulators may now start to show signs of being uncomfortable with the level of housing market investment.
Compared with this time last year, investors may now find it harder to secure a property with changes to solid investment fundamentals, particularly in the cities where capital gains have been significant and yields are low.
As a proportion of total lending, investor mortgage commitments were recorded at 39.4% in April 2014; when refinances are removed from this figure, this then increases to 47.8%.
Both figures are currently sitting close to their highest levels since late 2003 which was the tail-end of the boom in home values from 2001 to early 2004. Historically, the level of investment activity is well above average levels.
Tracking the change in home values on an annualised six-month basis, the proportion of total lending to investors continued to escalate following the peak in value growth. Across the most recent growth phase, investment lending continued to rise following the peak in value growth.
Over the current growth phase, six-month annualised value growth peaked in November 2013 at 14.3%. At that time, investors accounted for 38.5% of all lending which has since risen to 39.4%. Based on this, investment lending outpaced growth in capital city home values. Since values reached their recent trough in May 2012, home values increased by 16.1% to April 2014 compared to a 59.2% rise in the value of investment lending.
While growth in values peaked, there has also been a compression of gross rental yields.
At the low point in values at May 2012, gross rental yields across the combined capital cities were recorded at 4.3%; currently yields are 4.0%. A net figure calculation will deliver a much lower result.
Sydney and Melbourne are the two capital cities currently seeing the highest levels of investment activity. In Sydney, gross rental yields are at 4.0% while in Melbourne they are at 3.6%. In May 2012 these were 4.5% and 3.8% respectively.
Current investment activity in both cities is heavily focussed on the inner city unit market with the approvals for new units at high levels. Over the 12 months to April 2014, the number of units being approved in Sydney is at near-to record high levels. Although Melbourne approvals have fallen recently, they remain elevated and are 59% above their decade average.
With a high volume of investment grade unit stock is in the pipeline, it will be interesting to see if these approvals convert to construction and what impact a large supply may have on values, rents and vacancy rates.
The value of diligent research and a carefully considered purchase decision is all the more important when values aren’t rising as fast.
