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Sydney’s growth slows, Melbourne remains strong

Home values across the combined capital cities continued to rise in August; however, they did so at a much more moderate pace. Sydney continues to see strong increases in values, with dwelling values in the city moving 1.1 per cent higher over the month. This growth in values over the month sees the total value of Australian housing remain at $6 trillion.

Across the CoreLogic RP Data combined capital city index, dwelling values increased by 0.3 per cent in August, by 5.3 per cent over the three months to August and by 10.2 per cent over the past 12 months. The softer growth conditions in August have seen the annual rate of value growth slow from 11.1 per cent at the end of July 2015. The annual rate of growth still remains below the recent peak of 11.5 per cent over the 12 months to April 2014.

The rate of capital growth in Sydney and Melbourne has been exceptionally strong over the past year. The remaining capital cities continue to experience much more moderate rates of capital growth. Home values in Sydney have increased by 17.6 per cent over the past year, while Melbourne values are 10.6 per cent higher. Brisbane has seen the third highest rate of value growth over the year; however, values have risen by a much more moderate 3.9 per cent. Three capital cities have also recorded declines in values over the year, with Perth home values falling -1.8 per cent, Darwin values -4.6 per cent lower and Canberra values falling -0.9 per cent.

Over the past year, detached house values have outpaced unit values across all capital cities except for Darwin and Canberra. The combined capital city index shows that house values have increased by 10.6 per cent over the past year, compared to a 7.4 per cent rise in unit values. Melbourne in particular has seen a large discrepancy between growth in house and unit values, with rises of 11.5 per cent and 2.9 per cent respectively. While the annual figures show slower growth for units, over the past three months unit values across the combined capitals have increased by 6.7 per cent, compared to a rise in house values of 5.1 per cent. Despite the recent data, units have generally consistently underperformed against houses in terms of capital growth. The underperformance over the past year can probably be attributed to a record high level of new unit supply entering the market, along with rising land values which push up the cost of houses.

A major contributing factor to the strength of home value growth in Sydney and Melbourne is the relatively short supply of homes listed for sale. In Sydney there are approximately 17,700 properties for sale currently and in Melbourne there are 28,000. In late 2011 when market conditions were much softer than they are currently, Sydney had around 40,000 properties for sale and Melbourne had almost 39,000 listings.

Conversely, in Perth and Darwin where the housing market conditions are much weaker, listing numbers have shown a consistent rise. Total listing numbers are now 18 per cent higher than a year ago in Perth and 15 per cent higher in Darwin.

With listing numbers remaining relatively low in Sydney and Melbourne, together with market demand remaining high, buyers continue to face a level of urgency in relation to their purchase decision – another factor driving prices higher in these cities. Sydney homes are selling in just 25 days, with Melbourne homes selling over a slightly longer time frame at 35 days. The remaining capital cities are taking more than 50 days on average to sell, with Hobart and Darwin the longest at 91 days and 78 days respectively.

Another indicator of relative market strength in Sydney and Melbourne is clearance rates. The success rate for capital city auctions has slipped from the high-70 per cent range to the mid-70 per cent range during recent months and is trending lower. Nevertheless, the current rate of auction clearance is still reflective of quite strong levels of capital growth in both Sydney and Melbourne.

Australia’s largest city, Sydney, remains the hottest housing market, with dwelling values moving 17.6 per cent higher over the past year. This represents a slight slowing from the annual rate of growth in July; nevertheless, it remains a rapid rate of growth from a historical standpoint and relative to the other capitals. House values were up by 18.6 per cent over the year and unit values increased by a lower 12.7 per cent.

While dwelling values are rapidly rising, rental rates across Sydney are increasing by only 2.3 per cent per annum, which has resulted in gross rental yields shifting to record lows. The typical Sydney house is now showing a gross rental yield of just 3.1 per cent, the lowest on record, while units are showing an average gross yield of 4.1 per cent, which is also a record low.

In Melbourne, growth conditions have picked up over the past three months, recording a higher rolling quarterly rate of growth than Sydney at 8.0 per cent. Detached houses continue to be the main driver of Melbourne’s appreciating home values. House values were 11.5 per cent higher over the year compared with a 2.9 per cent gain in unit values. Similar to Sydney, rental growth has been subdued across the Melbourne regions, with dwelling rents increasing by just 2.2 per cent over the past twelve months. The average gross yield on a Melbourne house is now at a record low of just 3.0 per cent, while units are returning an average gross yield of 4.1 per cent.

Brisbane’s housing market was the third strongest performer for growth in dwelling values across the capital cities over the past twelve months, with values rising by 3.9 per cent. The capital gain has been driven almost exclusively by the detached housing sector, where house values have moved 4.3 per cent higher over the year compared with a 0.5 per cent rise in unit values. Compared with the other largest capital cities rental yields are much healthier in Brisbane, with the average gross yield on houses recorded at 4.4 per cent, while the unit market is showing a higher 5.4 per cent average gross yield.

Adelaide’s home values have fallen by -01 per cent over the three months to August 2015; however, they are 1.8 per cent higher over the past year. The 1.8 per cent increase in home values places Adelaide as the market which is fourth strongest for capital gains. This 1.8 per cent rise in home values is comprised of a 1.8 per cent increase in house values and a 1.2 per cent rise in unit values. Adelaide rental rates have fallen by -0.2 per cent over the year for houses and are -0.1 per cent lower for units. The sharper rise in home values relative to rents has seen a slight moderation in gross rental yields, currently recorded at 4.1 per cent for houses and 4.7 per cent for units.

Perth’s home values have fallen slightly over the past year, with dwelling values across the westernmost capital city down by -1.8 per cent over the past twelve months. The decline in dwelling values has been much greater across the unit market, where values have fallen by -5.2 per cent over the year compared with house values, which were -1.5 per cent lower.  The local rental market is seeing larger declines, with house rents down -5.6 per cent and unit rents falling by -6.8 per cent. The large fall in weekly rents is also pushing local yields down, with the typical Perth house now showing a 3.9 per cent gross yield while units are returning a gross yield of 4.5 per cent.

Although there have been occasional signs of an improvement in Hobart’s housing market, conditions remain relatively flat across the city. Over the past 12 months Hobart home values have increased by 1.5 per cent, with 1.4 per cent of that growth coming over the first eight months of this year. House values have increased by 1.7 per cent over the year compared to a -0.6 per cent fall in unit values. House rents are up 1.2 per cent over the past twelve months and unit rents are 4.2 per cent higher, which has pushed local gross rental yields to the second highest of any capital city. Rental yields sit at 5.2 per cent for houses and 5.5 per cent for units.

Darwin’s housing market is well into a correction, with dwelling values down -4.6 per cent over the past year. House values have recorded a larger fall than unit values, down -4.8 per cent compared with a -3.7 per cent fall in unit values. Weekly rents are also moving lower; house rents have fallen by -10.8 per cent over the year and unit rents are down -9.1 per cent. Despite the sharp fall in weekly rents, Darwin’s gross rental yields are still the highest of any capital city for detached houses at 5.5 per cent and equal highest with Hobart for units at 5.5 per cent.

The housing market in Canberra had been showing signs of growth lately; however, recent weakness has seen home values fall by -0.9 per cent over the past year. Canberra is also one of the few cities where the annual rate of growth for unit values (0.9 per cent) has been greater than houses (-1.0 per cent). Rental rates had been recently declining; however, house rents have increased by 0.7 per cent over the past year while unit rents have fallen by -0.3 per cent. Gross rental yields are currently recorded at 4.1 per cent for houses and 4.9 per cent for units.

The housing markets around Australia are as diverse as ever. While markets are booming in Sydney and Melbourne, they are softening in Darwin, Perth and to a lesser extent Canberra. Across the regional areas of the country we are seeing coastal and lifestyle markets broadly bouncing back in value as buyer demand ramps up after a long slump, while towns reliant on the resources sector are moving through a downturn.

The diversity in the housing market highlights the different growth drivers that are evident from region to region. The economies of Sydney and Melbourne are relatively sheltered from the downturn in the resources sector; they are benefitting from a very healthy services sector and positive population inflows, while the mining states and territories are experiencing softer economic conditions and a wind-down in population growth.

The moderation in the rate of growth across our combined capital cities index in August is likely to be a positive development for Australian regulators, such as the Reserve Bank and APRA, who have been highlighting concerns about the strong rate of value growth in Sydney and Melbourne. Of course it is only one month and it will be interesting to see whether the slowing trend will persist, particularly as we head into the busy spring selling season.

The annual expansion in investor-related housing credit has continued at a pace that is higher than APRA’s mandated 10 per cent growth per annum. However, July figures from the Reserve Bank show credit for investment housing has increased by 10.8 per cent over the year, down from growth of 11.1 per cent the previous month. Furthermore, in June investor housing credit rose by 0.6 per cent, its slowest monthly increase since October 2013. With many banks now placing a premium on investment mortgage interest rates and also increasing serviceability limits on all mortgages, we may be starting to see the first evidence of a cooling in investment housing demand.

The cumulative effect of tighter lending conditions, more expensive mortgage rates for investors and lower yields, as well as natural affordability constraints and higher levels of new housing supply, is likely to dampen some of the exuberance we have seen across the Sydney and Melbourne housing market. Listing numbers are already showing their seasonal spring climb, which will provide a timely test of the housing market’s strength through spring. Furthermore, auction clearance rates have been trending lower in both Sydney and Melbourne over the past couple of months, highlighting a potential moderation in the rate of home value growth in these cities.

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Cameron Kusher

Cameron Kusher is CoreLogic RP Data’s senior research analyst, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors.