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CoreLogic October Home Value Index: Growth conditions flat nationally but Sydney values fall

The CoreLogic October Home Value Index Results show that growth conditions remained flat on a national basis while Sydney values fall.

Since moving through a peak rate of growth in November 2016, capital gains across Australia’s housing market have been losing momentum, with national dwelling values unchanged over the month of October.

For October, conditions were flat across both the combined capital cities and the combined regional areas of Australia, however, over the past twelve months growth in the capital cities (+7.0%) has outperformed the regional areas (+4.9%).

CoreLogic head of research Tim Lawless said, “The slowdown in the pace of capital gains can be attributed primarily to tighter credit policies which have fundamentally changed the landscape for borrowers.”

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan to valuation ratios or higher loan to income multiples. Additionally, interest-only borrowers and investors are facing premiums on their mortgage rates which are likely to act as a disincentive, especially for investors who are generally facing low rental yields on investment properties.

“In fact, the peak rate of growth in dwelling values lines up closely with the peak growth rate for investment lending in late 2016. We saw the housing market respond in a similar fashion through 2015, and the first half of 2016 as investors faced tighter credit conditions following the announcement from APRA that lenders couldn’t surpass a 10% speed limit on investment lending.”

“Of course, housing market conditions rebounded swiftly through the second half of 2016 once the investment related credit limits were achieved and the cash rate was adjusted lower in May and August last year” Mr Lawless said.

Sydney joins Perth and Darwin as the only cities to record a fall in dwelling values over the past three months

While most of the broad regions are experiencing a slowdown in the rate of capital gains, only three capital cities have recorded a negative movement in values over the three months ending October: Sydney (-0.6%), Perth (-0.7%) and Darwin (-4.4%).

Mr Lawless said, “Seeing Sydney listed alongside Perth and Darwin, where dwelling values have been falling since 2014, is a significant turn of events.”

Melbourne conditions remain resilient relative to Sydney

For Melbourne’s housing market, conditions have remained much stronger relative to Sydney; dwelling values were 0.5% higher over the month to be up 1.9% over the rolling quarter. Mr Lawless attributes this resilience to Victoria’s record breaking migration rate, which is creating unprecedented housing demand. Additionally, strong jobs growth and a healthier level of housing affordability relative to Sydney are also supporting continued growth in housing values in Melbourne.

“Despite the stronger growth profile, Melbourne dwelling values are now rising at their slowest quarterly pace since mid-2016,” Mr Lawless said.

While market conditions in Sydney, and to a lesser extent, Melbourne, are easing, other markets are showing very different trends. Hobart continued to be the strongest capital city, with dwelling values pushing 0.9% higher in October, to be up 12.7% over the past twelve months.

Mr Lawless said, “Hobart is benefitting from renewed housing demand in the form of interstate migration, particularly Sydneysiders and Melbournites who appear to be utilising their enhanced wealth positions to buy very well in Hobart, where housing prices are substantially lower than those in Australia’s largest cities.”

The trend in Brisbane and Adelaide has remained relatively subdued, with Adelaide dwelling values unchanged in October, while Brisbane values were only 0.2% higher. On an annual basis, dwelling values are only 2.7% higher across Brisbane and 4.6% higher in Adelaide.

The two toughest real estate markets, Perth and Darwin, are showing a further divergence in their performance. Perth dwelling values moved sideways over the month, however the annual rate of decline has slowed from -4.9% in August last year to -2.5% over the twelve months ending October 2017. The trend in Darwin hasn’t been as encouraging, with values slipping -4.4% lower over the past three months to be down -5.3% over the past twelve months. The correction across Darwin’s housing market has now surpassed 20% since values peaked in May 2014.

Unit markets generally underperforming relative to houses, except in Sydney.

Rental conditions improving but yields remain low

While the pace of capital gains has slowed across most regions, some momentum is gathering across rental markets, however, rental growth has not been high enough to reverse the downwards trend in yields. The national annual pace of rental growth has lifted from 0.9% a year ago to 2.8% over the most recent twelve month period. Considering national dwelling values were 6.6% higher over the past twelve months and rents rose by 2.8%, yields have compressed further over the past year and generally remain at or close to record lows in most cities.

The two exceptions are Sydney and Darwin, where yields have shown a subtle improvement over recent months, due to dwelling values underperforming relative to weekly rents. Mr Lawless said, “If the Sydney market continues to see values slip lower while rents gradually rise, yields will repair, however a recovery in rental returns is likely to be a slow process.” Gross rental yields across Melbourne remain the lowest of any capital city, with the typical dwelling attracting a gross yield of 2.89% (record low) which is 20 basis point lower than a year ago. To provide some context about why rental yields have compressed so much, over the growth cycle to date, Melbourne dwelling values are up 58% while weekly rents have only increased by 15.5% over the same time frame.

Regional Western Australia (-3.0%) and regional South Australia (-0.9%) were the only ‘rest-of-state’ areas to record a fall in dwelling values over the past year, while regional Queensland dwelling values were up 1.6% and regional Northern Territory saw values rise 1.3%.

Where to from here?

Financial markets have pushed expectations for a cash rate hike out to early 2019, which, according to Mr Lawless, implies that mortgage rates aren’t likely to rise materially over the foreseeable future.

Mr Lawless said, “Overall, performance across Australia’s housing market remains as diverse as ever. Historically, sustained growth cycles have generally been followed by a period of negative growth, so a further reduction in dwelling values should not come as a surprise. “While the weaker Sydney housing market is dragging headline growth rates lower, there are a variety of factors that are likely to support a soft landing across Australia’s housing market.”

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