Highlights over the three months to December 2016
Best performing capital city: Darwin +5.9 percent
Weakest performing capital city: Adelaide -1.6 percent
Highest rental yields: Hobart houses with gross rental yield of 5.1 percent and Hobart Units at 5.7 percent
Lowest rental yields: Melbourne houses with gross rental yield of 2.7 percent and Darwin units at 3.6 percent
Most expensive city: Sydney with a median dwelling price of $852,000
Most affordable city: Hobart with a median dwelling price of $345,000
December appeared to be a good month for the value of capital city dwellings as homes values across Australia grew by 1.4 percent, bringing the annual capital gain for last year up to 10.9 percent, the highest since 2009, according to the CoreLogic December Home Value Index.
Across Australia’s capital cities, the annual change in dwelling values for 2016 ranged from -4.3 percent in Perth to 15.5 percent in Sydney, with Melbourne and Hobart also showing annual capital gains higher than 10 percent.
“Capital city growth rates have also shown a growing divergence between the broad housing product types,” CoreLogic head of research Tim Lawless said.
“Over the past twelve months, we have seen capital city house values rise by 11.6 percent, while unit costs have increased by roughly half the pace at 5.9 percent.”
“The divergence in growth rates is the most distinct in Melbourne and Brisbane, where concerns around unit oversupply have eroded buyer confidence,” he said.
“Melbourne house values were up 15.1 percent over the year compared with a 1.7 percent rise in unit costs, while Brisbane home values are 4.0 percent higher over the year, with unit values falling by -0.2 percent,” he added.
Australia’s regional housing markets did not experience as much growth as conditions in the capital cities, with annual growth to November recorded at 2.8 percent across the combined regional markets.
New South Wales regional areas showed the strongest growth conditions, with non-capital city house values rising 7.3 percent over the 12 month period to November 2016.
Lawless said the remaining rest-of-state regions showed relatively unchanged circumstances, with costs rising by half a percent across regional Victoria, one percent across regional Queensland and 1.1 percent across regional South Australia, while regional Western Australia house values fell by 7 per cent in the year.
“Those regional areas with intrinsic ties to the mining and resources sector have continued to record weaker housing market conditions since the end of the mining infrastructure boom, with Perth and Darwin recording the weakest housing market conditions across the capital cities,” he said.
“Since values peaked in these markets during 2014, values have fallen by a cumulative 7.9 percent in Perth and 5.9 percent in Darwin.”
Both of these markets have shown signs of moving through the low point of their downturns, with values rising by 2.8 per cent and 5.9 per cent respectively over the final quarter of 2016.”
Based on the annual housing market results, Lawless said it is clear that housing markets across Australia have responded to regional differences in economic and demographic trends, with strong growth trends spread to Hobart and Canberra, as well as many of the coastal and lifestyle markets where values are now also rising swiftly.
Sydney’s home values almost double in the same time period
Sydney’s dwelling values have almost doubled post global financial crisis, increasing by 97.5 percent since January 2009, while Melbourne’s home values rose by 83.5 percent over the same time frame.
Every other capital city has seen dwelling values rise at a lower rate during this period, highlighting just how secured the Sydney and Melbourne housing market conditions have been over the past eight years.
“Sydneysiders saw dwelling values increase by approximately $10,000 per month over the past year, creating a significant boost in wealth for homeowners; at the same time we’ve seen mounting affordability challenges for aspiring homeowners,” Lawless said.
The recent CoreLogic Housing Affordability Report revealed that Sydney dwelling prices were 8.3 times higher than annual household incomes and families were dedicating an average of 44.5 percent of their income to service a mortgage.
The rental yield profile has also deteriorated substantially over the current housing growth cycle, with yields progressively pushing to new record lows over the year.
The December results showed the average gross yield for capital city houses was 3.1 per cent and unit returns were tracking at 4.1 per cent.
At the beginning of the current growth cycle, which started in June 2012, the yield profile was much healthier, with gross yields averaging 4.2 per cent and 4.8 per cent respectively.
While rental yields have compressed across most of the capitals, the record lows are mainly being driving by the Melbourne and Sydney housing markets, where dwelling values have appreciated at a substantially faster rate than rents.
Over the growth cycle to date, Sydney home values are up 69 percent while rents have increased by approximately 10 percent; this has caused the gross dwelling yield to fall from 4.5 percent in June 2012 to the current record low of 3.0 percent.
Meanwhile in Melbourne, dubbed as the world’s most liveable cities, housing values are 51 percent higher over the cycle to date, while rents have lower by 9.6 percent.
The divergence between home value growth and rental growth has compressed Melbourne’s gross yield profile to a new record low of 2.9 percent from 3.8 percent in June 2012.
“Considering the trends in value growth remain stable, and rental conditions are comparatively sedated, there is a high likelihood that yields may drift even lower during 2017,” Lawless said.
Transaction numbers recorded their average seasonal fall in December, however comparing CoreLogic estimates of turnover with the same time last year highlights that dwelling sales remain slightly lower than a year ago, despite an upwards trend in activity over the second half of 2016.
Several regions have bucked the trend towards lower home sales, with the number of sales rising compared with last year across the Northern Territory, Australian Capital Territory and South Australia.
Houses Units CoreLogic estimates that there were approximately 465,500 home sales last year, which was 8.7 percent lower from the previous year and 3.8 percent lower than the ten-year average.
“Lower sales aren’t necessarily due to lower housing demand,” Lawless said.
In most markets, the slowdown in turnover is more attributable to a shortage of stock available for sale rather than a lack of buyer demand,” he said.
Low growth rates predicted for 2017
Lawless said that the housing market was likely to face some headwinds that may result in moderation growth rates this year.
“Mortgage rates were already trending higher towards the end of 2016, despite any movements in the Reserve Bank cash rate, higher mortgage rates have the potential to quell housing demand, especially considering the record-high levels of household debt which implies consumers are highly sensitive to changes in the cost of debt,” he said.
“We’re also seeing high levels of supply weighing down the rate of capital gains in the unit sector.”
Lawless also noted that regulators might consider implementing policies aimed at reducing investment activity in the housing market.
Based on Australian Bureau of Statistics housing finance data, investors have been progressively increasing their share of mortgage demand since the May and August rate cuts last year.
The latest data shows investors now comprise 49 percent of mortgage demand, excluding refinanced loans.
“With rental yields at record lows, it is logical to assume investors are mainly speculating on future capital gains in dwelling values and disregarding the low yield profile,” Lawless said.
If housing market investment activity does reduce, it has the potential to mitigate some of the upwards pressure on home values.”
“While we expect 2017 dwelling values to rise at a lower rate than in 2016, there is still potential for further growth across Australia’s housing market,” he said.
“Smaller capital cities such as Canberra and Hobart have demonstrated an accelerating growth trend, and recent CoreLogic data suggests that Darwin and Perth may be approaching, or moving through the bottom of the downturn,” Lawless said.
“Lifestyle markets are also becoming more popular as tourism improves and homeowners look to leverage their new found equity,” he added.