Urgency driving prices higher in Sydney and Melbourne: Tim Lawless
July was another strong month for capital gains across the Sydney and Melbourne housing markets with dwelling values moving 3.3% and 4.9% higher over the month.
The latest month of growth as well as the large number of new dwellings that have been constructed has pushed the overall value of Australian housing to just over $6 trillion dollars.
Across our combined capital city index, dwelling values across the nation’s capitals have increased by 4% over the past three months and 11.1% higher over the year. The annual rate of home value appreciation has been accelerating since March and is now almost as high as the previous cyclical high recorded in April 2014 when values were 11.5% higher over the 12 month period.
Sydney’s annual rate of growth, at 18.4% over the twelve months to the end of July, was the highest on record since 2002.
While growth conditions in Melbourne and Sydney have been extreme, the remaining capital cities continue to see milder rates of growth. The third highest capital gain across the nation’s capitals was recorded in Brisbane where values were 3.9% higher over the past twelve months. At the other end of the spectrum, Darwin values have shown the most substantial correction over the year, down by 5.3% and Perth values are also down, having moved 0.3% lower over the year.
Detached housing has continued to outpace the unit sector for capital gains across every capital city except Darwin and Hobart. Across the capital cities index, house values were 11.6% higher over the year and unit values were 7.2% higher. The gap between house and unit performance is the most substantial in Melbourne where house values have risen 12.3% over the past year compared with a 4.8% rise in unit values. The underperformance of the unit sector can probably be attributed to the large amount of new unit supply that has flowed into the market over recent years as well as the upwards pressure on vacant land prices that is pushing house values higher.
One of the factors driving values higher in the largest cities is the short supply of homes available for sale. As a prime example, in Sydney we are currently tracking approximately 18,150 advertised property listings, which is historically well below average. To provide some context, in late 2011 when market conditions were relatively soft there were slightly more than 40,000 homes available for sale across the Sydney market.
Conversely, in those cities where the housing market is weakening, listing numbers have shown a consistent rise. Total listing numbers are now 22% higher in Darwin and 17% higher across the Perth housing market.
With listing numbers remain low in Sydney and Melbourne, together with market demand remaining high, buyers have been faced with some urgency in their decision making which is another factor driving prices higher in these cities. Sydney homes are selling in just 26 days with Melbourne homes selling over a slightly longer time frame at 34 days. The remaining capital cities are taking more than 50 days on average to sell, with Hobart and Darwin the longest at 70 days.
Another indicator of ongoing market strength in Sydney and Melbourne is clearance rates. The success rate for capital city auctions has slipped from the high 70% range to the mid 70% range during winter, however that is still a historically high rate of clearance and the moderation is more than likely seasonal.
Australia’s largest city, Sydney, remains the hottest housing market, with dwelling values moving 18.4% higher over the past year. This is the highest rate of annual growth since 2002. House values were up by 19.8% over the year and unit values increased by a lower 11.9%. While dwelling values are rapidly rising, rental rates across Sydney are increasing by only 2.5% per annum which means gross rental yields are being pushed to record lows. The typical Sydney house is now showing a gross rental yield of just 3.2% which is the lowest on record while units are showing an average gross yield of 4.2%.
In Melbourne, growth conditions have picked up over the past three months, with Melbourne recording a higher rolling quarterly rate of growth than Sydney at 6.1%. Detached houses continue to be the main driver of Melbourne’s appreciating home values. House values were 12.3% higher over the year compared with a 4.8% gain in unit values. Similar to Sydney, rental growth has been subdued across the Melbourne regions with dwelling rents increasing by just 2.1% over the past twelve months. The average gross yield on a Melbourne house is now at record lows at just 3.0% while units are returning an average gross yield of 4.1%.
Brisbane’s housing market was the third strongest performer across the capital cities for capital gains over the past twelve months, with dwelling values rising 3.9%. The capital gain has been driven exclusively by the detached housing sector where house values have moved 4.6% higher over the year compared with a 2.5% fall in unit values. Compared with the other largest capital cities, rental yields are much healthier in Brisbane with the average gross yield on house recorded at 4.4% while the unit market is showing a higher 5.5% average gross yield.
Adelaide’s housing market recorded a 1.1% dip in dwelling values over the month of July, taking local values 0.2% lower over the first seven months of the year. Adelaide home values have increased by 3.4% over the past twelve months, and comprised of a 3.4% rise in house values and a 3.1% rise in unit values. Adelaide rents have remained virtually flat over the past year, with house rents increasing by 0.4% and unit rents up by 0.3%. The sluggish rental markets has seen gross rental yields across Adelaide slip a little further to register at 4.2% gross for houses and 4.7% gross for units.
Perth’s home values have remained relatively steady over the past year with dwelling values across the western most capital city falling by 0.3% over the past twelve months. The decline in dwelling value has been confined to the unit market where values have fallen by 5.7% over the year compared with house values which were virtually flat over the year with a 0.1% upwards movement. The local rental market is seeing larger declines, with house rents down 5.5% and unit rents falling by 7.2%. The large fall in weekly rents is also pushing local yields down, with the typical Perth house now showing a 3.9% gross yield while units are returning a gross yield of 4.5%.
The housing market across Hobart is once again on an improving trend with local dwelling values moving 2.6% higher over the first seven months of the year and 2.5% higher over the past twelve months. Hobart’s market still has some way to go before staging a nominal recovery, with dwelling values remaining 6.6% lower compared with the previous 2009 peak in dwelling values. House rents are up 2.1% over the past twelve months and unit rents are 4.1% higher which has pushed local gross rental yields to the second highest of any capital city.
Darwin’s housing market is well into a correction with dwelling values down 5.3% over the past year. House values have recorded a larger fall than unit values, down 5.7% compared with a 3.2% fall in unit values. Weekly rents are also moving lower; house rents have fallen by 9.5% over the year and unit rents are down 8.1%. Despite the sharp fall in weekly rents, Darwin’s gross rental yields are still the highest of any capital city for detached houses at 5.7% and equal highest with Brisbane for units at 5.5%.
The housing market in Canberra has been on improving trend with values rising 4.9% over the first seven months of the year to be 1.2% higher over the past twelve months. The annual growth in dwelling values has been driven entirely by a rise in house values which are up 1.4% over the past twelve months while unit values are down 0.6%. Local gross rental yields are higher than the capital city average with the typical Canberra house providing a 4.1% average gross yield and units are showing an average gross yield of 5.0%.
The housing markets around Australia are as diverse as ever. While markets are booming in Sydney and Melbourne, they are correcting in Darwin and Perth. Across the regional areas of the country we are seeing coastal and lifestyle markets broadly bouncing back in value as buyer demand ramps up after a long slump, while towns reliant on the resources sector are moving through a downturn.
The diversity in the housing market highlights the different growth drivers that are evident from region to region. The economies of Sydney and Melbourne are relatively sheltered from the downturn in the resources sector and are benefitting from a very healthy services sector while the mining states and territories are experiencing softer economic conditions and a wind down in population growth.
The increase in the rate of growth across our combined capital cities index is likely to be causing some concern to Australian regulators such as the Reserve Bank and APRA who would have been hoping to see the opposite trend; a slowdown in capital gains in line with tighter lending conditions around investment mortgages.
The annual expansion in investor related housing credit has continued at a pace that is higher than APRA’s mandated 10% growth per annum, with June figures from the Reserve Bank showing credit for investment housing had increased by 10.9% over the year to reach its highest annual level since 2013. With many banks now placing a premium on investment mortgage interest rates while also looking to slow down their pace of investment lending we would suspect investors will start to comprise a smaller proportion of the market.
The cumulative effect of tighter lending conditions, more expensive mortgage rates for investors and lower yields, as well as natural affordability constraints and higher levels of new housing supply, is likely to dampen some of the exuberance we have seen across the Sydney and Melbourne housing market. Listing numbers are likely to start their spring climb over the coming month which will provide a timely test of the housing markets strength through spring.
Tim Lawless is head of the CoreLogic RP Data research and analytics team and can be contacted here.