Best performing capital city: Hobart +5.6 percent
Weakest performing capital city: Darwin -3.1 percent
Highest rental yields: Hobart & Darwin with gross rental yield of 5 percent and Hobart units at 5.6 percent
Lowest rental yields: Sydney & Melbourne houses with gross rental yield of 2.7 percent and Sydney units at 3.7 percent
Most expensive city: Sydney with a median dwelling price of $805,000
Most affordable city: Hobart with a median dwelling price of $355,000
Capital city dwelling values moved 1.4 percent higher over the month, taking the combined capital city index to an annual growth rate of 12.9 percent; the highest annual rate of growth since the twelve months ending May 2010.
Four of Australia’s eight capital cities are now showing an annual growth rate in dwelling values higher than 10 percent, while Perth and Darwin values continue to trend lower on an annual basis.
According to CoreLogic head of research Tim Lawless, the March results highlight the continued resurgence in the pace of capital gains.
“This became evident through the second half of 2016, fuelled largely by lower mortgage rates and a rebound in investment activity. Since June last year, the CoreLogic capital city hedonic index has increased by 9.3 percent,” he said.
“While Sydney and Melbourne recorded the strongest growth conditions, the annual rate of capital gains has also moved into double-digit growth in both Hobart (+10.2 percent) and Canberra (+12.8 percent).”
Demonstrating the diversity across capital city markets, on an annual basis, dwelling values in Perth fell by -4.7 percent and by -4.4 percent in Darwin where economic conditions and migration trends remain weak across both cities.
Adelaide and Brisbane also saw dwelling values continue to trend higher at a sustainable pace with increases of 3.4 percent and 3.7 percent respectively in these cities over the past twelve months.
Lawless said the diversity of performance between houses and units is also a current key feature of the housing market.
Across the combined capitals index, house values were 13.4 percent higher over the past twelve months compared with a 9.8 percent rise in unit values.
“The disparity in growth rates is more significant in those cities where high new unit supply is more apparent. In Melbourne, house values were 17.2 percent higher over the past twelve months compared with a 5.2 percent increase across the unit sector. Similarly, in Brisbane, house values were 4 percent higher over the past twelve months compared with a 0.2 percent rise in unit values over the same period.”
“The weaker growth conditions within the unit markets’ sector reflect heightened levels of new supply across specific inner city precincts and also suggests that consumer confidence has been negatively affected by the warnings of a potential unit oversupply.”
Whether such strong growth conditions can be sustained much longer is yet to be seen, said Lawless.
“Given the recent policy announcements from the Australian Prudential Regulation Authority (APRA) are aimed at dampening investment related credit demand, we can expect lending conditions for investment purposes will tighten, particularly for investors with small deposits or those applying for an interest only loan. Additionally, higher mortgage rates handed down by Australia’s major banks may contribute towards cooling some of the exuberance being seen in the largest capital city housing markets.”
“Furthermore, organic constraints in the market are becoming more pronounced. As examples, record-low rental yields, which imply dwelling values are out of balance with rents, and heightened affordability constraints are preventing some prospective buyers from participating in the market.”
“Record-high levels of apartment supply are also likely to act as a brake on capital gains in those precincts where supply levels are high.”
Meanwhile, rental conditions have shown a subtle improvement across most cities but yields slip to new record lows in Sydney and Melbourne.
While some rental markets have recently seen a rise in the pace of rental growth, generally, the trend in rental appreciation remained soft in comparison with the rate of capital gains; growth in dwelling values is substantially outpacing rental growth in Sydney and Melbourne and gross rental yields have again slipped to record lows in these cities.
“This result has dragged the combined capitals yield profile to a new record-low. The gross yield on a Melbourne dwelling is now 2.8 percent while the gross yield on a Sydney dwelling is similarly low at 2.9 percent.”
“In the remaining capital cities, there is also downwards pressure on gross yields as dwelling values outpace rents.”
Low rental yields, higher mortgage rates and stricter lending policies around serviceability could create budgetary challenges for investors
With lenders tightening their serviceability models for all borrowers, having a negative cash flow on an investment property may become increasingly difficult to service.
“This is a particular concern where investor budgets are becoming thinly stretched by rising mortgage rates and low-income growth.”
“Stronger buyer demand can be attributed to the rising number of investors participating in the market compared with a year ago as well as the lower cash rate stimulus and population growth. However, overall transaction numbers remain approximately 15.5 percent lower than their recent 2013/14 peaks.”
Low listing numbers continue to create urgency for buyers With the number of properties being advertised for sale remaining low, Lawless said adding that this was creating a heightened sense of urgency in some markets.
Nationally, the number of residential properties advertised for sale was 6.9 percent lower than a year ago in March, and total listing numbers were 4 percent lower across the capital cities.
Every capital city is now seeing fewer residential properties advertised for sale compared with a year ago. The largest declines have been in Hobart and Canberra where stock is being rapidly absorbed despite a rise in newly advertised properties.
“A shortage of advertised stock can contribute to upwards pressure on prices, as prospective buyers experience FOMO (fear of missing out) which reduces a buyer’s ability or willingness to negotiate on prices and causes some urgency in the decision-making process.”
Selling times, discounting rates and auction clearance rates remain strong across the ‘hot’ markets The low stock numbers are also evident in an analysis of CoreLogic selling metrics. Auction clearance rates have remained in the mid-to-high 70 percent range across the combined capitals since early February; largely the result of the high clearance rates in the prime auction markets of Sydney, Melbourne and Canberra.
Additionally, private treaty measures show that the average selling time remains low across the strongest markets. Homes are selling in approximately 30 days across Sydney and Melbourne while discounting rates are well below 5 percent in these markets as well.
Mortgage demand has also been strong across the month of March, with the CoreLogic Mortgage Index rising 8.1 percent over the twenty-eight days ending March 26.
CoreLogic mortgage platforms track mortgage-related activity, accounting for more than 95 percent of lender valuation events, including refinancing.
The index shows a strong correlation with the ABS housing finance data, indicating mortgage demand has remained strong over the first quarter of the year.
On APRA’s recent supervisory measures Lawless said this will reinforce sound residential mortgage lending practices in ‘an environment of heightened risks’ focus on dampening investment demand, but not quelling enthusiasm from this segment completely
“Based on housing finance commitments data for January from the Australian Bureau of Statistics (ABS), investors currently comprise slightly more than 50% of mortgage demand (excluding refinanced loans).
“Considering the unprecedented level of high-rise unit construction currently underway, a large portion of which is reliant on investors absorbing the supply, a material decline in investment activity could result in a growing level of settlement risk for newly developed unit projects.”