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Housing downturn loses some steam: CoreLogic

CoreLogic’s latest home value index results show the pace of declining property values in March eased relative to the past four months.

Head of Research at CoreLogic, Tim Lawless, confirmed that the 0.6 per cent drop in March was the smallest of the month-on-month declines since values fell by 0.5 per cent in October last year.

However, Mr Lawless noted that the market downturn has become geographically more widespread, with housing values lower across six of the eight capitals and five of the seven ‘rest of state’ markets over the month.

Over the three months to March 2018:

  • Best performing capital city: Hobart +1.2% (yet again!)
  • Weakest performing capital city: Darwin -3.9%
  • Highest rental yields: Darwin 6.0%
  • Lowest rental yields: Sydney 3.5%

On an annual basis

National dwelling values have been trending lower for seventeen months and have fallen by a cumulative 7.4 per cent since peaking in October 2017.

Six of the eight capitals recorded a fall in values over the March quarter, led by Darwin (-3.9 per cent), Melbourne (-3.4 per cent) and Sydney (-3.2 per cent).

Despite the broad-based weakness, the national index remains 15.9 per cent higher relative to five years ago, highlighting that most property owners remain in a strong equity position.

Across Hobart and regional Tasmania dwelling values remain at record highs. In Canberra (-0.2 per cent), Adelaide (-0.5 per cent) and Brisbane (-1.6 per cent), as well as regional Victoria (-0.8 per cent) they are only marginally lower.

Meanwhile in Darwin and Perth, where weak housing market conditions were driven by post-mining boom weaker economic and demographic conditions, dwelling values have fallen by a cumulative 27.5 per cent and 18.1 per cent respectively since peaking in 2014.

“The silver lining here is that housing is now very affordable and first home buyers are proportionally much more active relative to other areas of the country,” Mr Lawless said.

Regional versus capital

Across the 46 capital city sub-regions, only seven areas have avoided a fall in dwelling values over the past twelve months.

These positive growth areas include the metro areas of Hobart and Canberra, as well as regions of Brisbane and Adelaide.

According to Mr Lawless, the smaller number of capital city regions recording any level of growth in dwelling values highlights the broader geographical scope of this downturn. At the same time a year ago there were thirty  capital city sub-regions recording annual growth.

The weakest areas of the capital cities are now confined to Sydney and Melbourne, with some bias toward the more expensive areas of the cities. Melbourne’s prestigious Inner East has recorded the largest decline in values over the past twelve months (-16.1 per cent) followed by Sydney’s Ryde (-14.7 per cent ) and Sydney’s Inner South West (-14.1 per cent).

Meanwhile, across the 42 regional sub-regions, 18 regions show positive annual growth in dwelling values, demonstrating healthier conditions relative to the capital cities.

Areas of regional Tasmania topped the list of best performers, with the strongest housing market conditions rippling away from Hobart towards the major regional centres of the state where housing values are generally more affordable.

Regional areas adjacent to Melbourne are also continuing to show healthy market conditions, with Ballarat values 6.6 per cent higher over the year and Latrobe-Gippsland values rising 6.2 per cent. Lifestyle markets are generally still seeing positive growth conditions as well.

The weakest performers across the regional markets tend to be agricultural regions, as well as the areas adjacent to the Sydney metropolitan region where market conditions are showing a similar trend to Sydney’s downturn, albeit with a slight lag.

Rental market activity

Capital city rents slipped 0.1 per cent lower over the twelve months ending March 2019; the first negative reading since at least May 2005.

The negative change in annual rental activity was heavily influenced by the Sydney market, where weekly rents were down 3.1 per cent over the year.

Every other capital city apart from Darwin has recorded a modest rise in weekly rents over the year.

According to Mr Lawless, sluggish rental conditions are likely the result of higher rental supply coupled with a reduction in rental demand.

“Higher supply can be attributed to the surge in investment activity over recent years, while the reduction in demand is the result of more renters converting to first home buyers,” he said.

Despite slow rental conditions, gross rental yields are generally trending higher as rental rates outperform dwelling values.

Gross rental yields have moved off their record lows in Sydney and Melbourne, but these cities are still recording the lowest gross rental yields among the capital cities at 3.5 per cent and 3.6 per cent respectively.

Most other capital cities are recording gross rental yields around the mid-4 per cent range, with Darwin and Hobart showing a higher yield profile. Regional markets are generally showing a higher gross rental yield relative to the capital cities, which is a longstanding trend.

Credit availability

A key factor cited by CoreLogic in relation to the housing market will be credit availability.

CoreLogic data tracking the number of housing valuation events, which provides a timely proxy for mortgage activity, has remained around 14 per cent below activity levels of a year ago.

A similar trend is confirmed within the less timely ABS housing finance data, which continued to show a reduction in both investor and owner-occupier lending through to the end of January.

While this trend in weaker housing finance commitments is very much entrenched for investment lending, of concern to Mr Lawless is the sharp downturn in owner-occupier lending.

“The value of owner occupier lending is around 2.6 times the value of investor lending, so the substantial drop in owner occupier mortgage commitments perhaps explains why the housing downturn is becoming more widespread.

“The value of owner occupier housing finance commitments (excluding refi) was down 17.1 per cent compared with January last year and investment credit was 24.6 per cent lower.”

Outcomes

Overall, Mr Lawless said that the housing market has recently shown some tentative signs that the downturn in dwelling values is losing some steam.

“Although this is a positive development, the outlook for the housing market will continue to be affected by uncertainty related to the federal election, lending policies and, more broadly, domestic economic conditions.

“No doubt some prospective buyers and sellers are delaying their housing decisions until after the election; however, there is no guarantee that certainty will improve post-election, considering the impact of a wind-back to negative gearing and halving of the capital gains tax concession is largely unknown.

“It seems a reasonable assumption that removing an incentive from the market would result in some downwards pressure on activity and prices for a period of time,” he said.

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