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Australia’s growth cycle tapers as housing becomes less affordable

Australian housing values increased a further 1.6 per cent in July, according to CoreLogic.

The latest rise takes housing values 14.1 per cent higher over the first seven months of the year and 16.1 per cent higher over the past 12 months.

CoreLogic’s research director, Tim Lawless described the market as strong, but losing steam.

“The 16.1 per cent lift in national housing values over the past year is the fastest pace of annual growth since February 2004,” he said.

“However, the monthly growth rate has been trending lower since March this year when the national index rose 2.8 per cent.”

He attributed the lower rate of growth in housing values to several factors.

“With dwelling values rising more in a month than incomes are rising in a year, housing is moving out of reach for many members of the community,” Mr Lawless explained.

“Along with declining home affordability, much of the earlier COVID-19 related fiscal support, particularly related to housing, has expired.”

Mr Lawless also noted it was “encouraging to see additional measures being rolled out for households and businesses” amid the latest lockdowns.

“On the flip side, demand is being stocked by record low mortgage rates and the prospect that interest rates will remain low for an extended period of time,” Mr Lawless said.

“Dwelling sales are tracking approximately 40 per cent above the five-year average while active listings remain about 26 per cent below the five-year average.

“The mismatch between demand and advertised supply remains a key factor placing upwards pressure on housing prices.”

CoreLogic data found the pace of dwelling price appreciation has slowed across each of the capital cities.

Sydney has recorded the sharpest reduction, with the monthly capital gain falling from 3.7 per cent in March to two per cent in July.

Source: CoreLogic

Mr Lawless said Sydney was the most expensive city in Australia by some margin. On top of that, it was also the city where values have risen the most significantly over the first seven months of the year.

“Worsening affordability is likely a key contributing factor in the slowdown here, along with the negative impact on consumer sentiment as the city moves through an extended lockdown period,” Mr Lawless said.

Although the pace of growth has slowed, housing values continue to rise at a rate that is well above average across most areas of the country.

The previously stronger performance across regional markets relative to the capital cities has normalised through 2021.

After the combined regional areas of Australia recorded stronger housing market conditions through the second half of 2020, the first seven months of 2021 shows an almost equal rate of growth in dwelling values across the combined regional and capital markets with values up 14.5 per cent and 14 per cent respectively.

House markets continue to record much stronger growth in values relative to units

At the macro-level, national house values are up 18.4 per cent over the 12 months ending July, while unit values have risen by less than half this amount, up 8.7 per cent.

This trend where houses are rising faster in value than units is evident across every capital city, except Hobart.

“Hobart unit values are up 23 per cent over the past year while house values have risen by 21.7 per cent across the city,” Mr Lawless said.

“Potentially the slightly stronger conditions across Hobart’s unit sector reflects greater demand from downsizers and empty nesters, or it could be attributed to worsening affordability constraints, diverting demand into the more affordable unit sector where median values are around $156,000 lower than houses.”

Advertised listing numbers remain well below average across most parts of the country, despite the number of new listings added to the market trending higher than average, according to CoreLogic.

Recently there has been some volatility in new inventory levels, with the number of newly advertised properties falling sharply across Sydney and Melbourne amidst lockdowns.

In Sydney, the monthly number of new listings added to the market has fallen by approximately 30 per cent since the week ending June 27th , dragging total active listing numbers 13.7 per cent below the five year average.

Similarly, the number of new listings added to the Melbourne market dropped by 27 per cent between the week ending July 11th and 25th .

“We have seen the same trend through earlier lockdowns, where both buyer activity and vendor activity reduce before recovering to pre-lockdown levels once restrictions are eased or lifted,” Mr Lawless said.

“With stock levels remaining tight, selling conditions have been skewed towards vendors.

Auction clearance rates have remained in the low-to-mid 70 per cent range across the major auction markets through July and private treaty sales continue to record rapid selling times and low discounting rates.”

Source: CoreLogic

The upper quartile of the housing market has led the pace of capital gains, but is also showing the most visible signs of easing.

The most expensive quarter of capital city dwellings recorded a 7.8 per cent lift in values over the three months ending July 2021.

While this sector of the market continues to show the strongest performance, it has also shown the sharpest slowdown, with the quarterly pace of gains reducing by 1.4 per cent since its recent peak in April.

The number of home sales has held well above average over the year with CoreLogic estimating a 42 per cent year-on-year lift in the number of sales.

Mr Lawless noted the annual number of home sales has not been this high since the year ending January 2004.

“The past 12 months has seen nearly 600,000 dwellings sold across the country, approximately 140,500 more sales than the decade average.

“With buyer demand so strong and active listings well below average, prospective buyers are likely to be feeling a sense of urgency due to the level of competition in the market,” Mr Lawless said.

“However, with affordability constraints starting to impact purchasing capacity, it’s possible market activity could reduce through the second half of the year, helping to rebalance the market and take some heat out of the rate of house price growth.”

Rental markets remain tight

The annual pace of growth in national rents lifted to 7.7 per cent, the fastest rental appreciation since 2008.

Beneath the national figures, Mr Lawless said it was clear that rental markets remained diverse.

“Rental conditions across Darwin and Perth are the tightest amongst the capitals reflecting low vacancy rates and high rental demand,” he said.

“Both cities saw a substantial reduction in investment activity from 2014 which has likely contributed to the short supply of rental accommodation.

“At the other end of the spectrum are the apartment sectors of Melbourne and Sydney, where rental conditions have been substantially looser.

“The good news for landlords is that rental markets in these areas are stabilising following a substantial
reduction in rents due to high vacancy rates attributable to stalled overseas migration and a preference shift away from high density living during the pandemic.”

Source: CoreLogic

With housing values outpacing rents, CoreLogic found gross rental yields have trended lower. The national gross yield has reduced from 4.1 per cent two years ago to 3.4 per cent in July this year, which is a record low.

The most significant yield compression has been in Sydney, where gross yields have fallen to 2.5 per cent, and in Melbourne at 2.8 per cent. Every other capital city is recording gross yields at four per cent or higher.

“Considering mortgage rates on new investment loans are averaging around 2.8 per cent, gross rental yields outside of Sydney and Melbourne are likely to be providing opportunities for positive cash flow investment opportunities,” Mr Lawless said.

“Considering yields outside of Sydney and Melbourne are high relative to mortgage rates and housing values are expected to rise further, we are likely to see investment activity continue to lift.”

Overall, Mr Lawless said Australia’s housing market remains in a strong position, however signs of a slowing rate of appreciation have become more evident.

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