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The worst could now be behind us: CoreLogic

CoreLogic has released the home value index results for April 2019, confirming that the decline in home values has lost some momentum over recent months.

Dwelling values across Australia continued their downward trajectory in April, falling by half a per cent over the  month to be down -7.2 per cent over the past twelve months, and -7.9 per cent lower since peaking in September 2017.

Although housing values are broadly trending lower, the rate of decline has been easing since moving through a monthly low point in December last year when national dwelling values fell -1.1 per cent.

Head of Research at CoreLogic, Tim Lawless, said  the improvement in the rate of decline can be attributed to an easing in the market downturn across Sydney and Melbourne, where values were previously falling much faster.

“In December last year, Sydney dwelling values were down -1.8 per cent, with the pace of month-on-month falls progressively moderating back to -0.7 per cent in April.

“Similarly, Melbourne values were down -1.5 per cent in December, with the rate of decline improving to -0.6 per cent in April.”

Other signs showing a subtle improvement in market conditions include a rise in mortgage-related valuations activity and the fact that auction clearance rates are holding around the mid-50 per cent range across the major auction markets.

“While none of these indicators could be described as strong, the current trend in the data implies that housing market conditions may have moved through the worst of the downturn,” Mr Lawless said.

In April, dwelling values fell across every capital city except Canberra. Regional areas of Tasmania, Victoria and South Australia also avoided a fall.

Values were down by -0.9 per cent in Hobart, signalling a weakening across what has been one of the strongest capital city markets for value gains.

Over the three months to April 2019:

  • Best performing capital city: Hobart +0.5%
  • Weakest performing capital city: Darwin -3.4%
  • Highest rental yield: Darwin 6.0%
  • Lowest rental yields: Sydney 3.5%

On an annual basis

National dwelling values were down -7.2 per cent.

This is the largest annual fall since the twelve months ending February 2009, which was associated with the Global Financial Crisis.

Across the capital cities, Sydney (-10.9 per cent) and Melbourne (-10.0 per cent) are both now recording double digit annual declines, followed by Perth (-8.3 per cent) and Darwin (-7.1 per cent).

The largest gains were in Hobart (+3.8 per cent) and Canberra (+2.5 per cent), while Adelaide is the only other capital city to remain in the black over the past twelve months (+0.3 per cent).

Across the broad valuation cohorts, Tim Lawless confirmed that the most expensive quarter of the housing market in Melbourne (-13.7 per cent) and Sydney (-11.8 per cent) are continuing to record the largest annual declines.

Most other cities are recording less variance between the upper and lower quartiles of the market.

Markets where housing affordability is less challenging, such as Darwin and Perth, are recording a stronger performance (smaller declines) across the upper quartile.

Meanwhile in Hobart, where housing affordability has deteriorated rapidly, the most affordable quarter of the market continues to return a solid 8.2 per cent rise in values over the past twelve months.

While none of these indicators could be described as strong, the current trend in the data implies that housing market conditions may have moved through the worst of the downturn.

Regional versus capital

Across the 46 capital city sub-regions, only six areas have avoided an annual fall in dwelling values.

The best conditions can be found across Hobart and Canberra, as well as regions of Adelaide and Brisbane.

According to Mr Lawless, the fact that five of the top ten best-performing sub-regions are actually reporting a negative annual result for housing value movements highlights the broad-based nature of this housing downturn.

The weakest capital city sub-regions were generally confined to areas of Sydney and Melbourne, with Perth’s Mandurah also reappearing in the list of the weakest-performing capital city areas.

Melbourne’s prestigious Inner East leads the nation in recording the largest value falls, down 15.4 per cent over the past twelve months.

Meanwhile across the 42 regional sub-regions, 17 regions are recording positive annual growth in dwelling values, demonstrating healthier conditions relative to the capital cities.

Areas of regional Tasmania are showing the strongest growth conditions over the past twelve months.

The next strongest growth was in the Riverina region of NSW, where a 8.3 per cent rise in values across the Wagga Wagga region have been the main driver of growth.

Areas of regional Victoria are also well represented on the top performers list, led by Ballarat, where values are 5.9 per cent higher.

The weakest regional sub-regions are confined to the broader outback areas of Queensland and Western Australia, as well as the Wheat Belt of Western Australia, where weaker agricultural conditions are likely having a negative impact on housing values.

The regions adjacent to Sydney, including Illawarra, Newcastle & Lake Macquarie and the Southern Highlands & Shoalhaven have also recorded substantial falls in value over the past twelve months, following a similar downwards trajectory to the Sydney market.

Rental market activity

CoreLogic’s national hedonic rental index ticked 0.3 per cent higher in April to be up 0.4 per cent over the past twelve months.

Sydney’s rental market remains the largest drag on national rental growth, with rental rates falling -3.1 per cent over the past twelve months.

Darwin is the only other capital city where rents are down over the year, falling by -5.6 per cent.

Among the capitals, Hobart rents are rising the fastest, up 5.7 per cent over the past twelve months due to strong demand coupled with low rental supply.

Although rental markets are generally sluggish, gross rental yields are continuing to recover from their recent record lows.

Nationally, the gross rental yield is recorded at 4.13 per cent, the highest gross yield since May 2015, but still 15 basis points below the decade average of 4.28 per cent.

Each of the capital cities and broad regional rental markets of Australia have recorded either a steady or higher gross yield profile relative to the same time a year ago; a reflection of rents outperforming dwelling values.

Considering that tighter credit conditions were one of the primary catalysts for the housing market downturn, any sign that credit availability is improving would be a welcome outcome for the housing market.

Credit conditions

Mr Lawless once again impressed that we are seeing further evidence that the worst of the housing market conditions are now behind us.

“Values are still broadly declining; however, the pace of decline has moderated since December last year and there are some tentative signs that credit flows have improved, albeit from a low base.

“Considering that tighter credit conditions were one of the primary catalysts for the housing market downturn, any sign that credit availability is improving would be a welcome outcome for the housing market.”

According to the Australian Bureau of Statistics (ABS), lending to households for dwellings (excluding refinancing) was up 2.7 per cent on a seasonally adjusted basis in February.

A rise in CoreLogic valuation platform activity throughout March hints at a further improvement in housing finance, which will likely be reported in the next ABS release.

Another indicator of a subtle improvement in the housing market can be seen in auction clearance rates which are holding around the mid-to-low 50 per cent range.

The correlation between auction results and housing market conditions is strongest in Melbourne and Sydney.

While Mr Lawless said that a mid-50 per cent clearance rate doesn’t suggest housing prices are set to bounce back, he thinks it does imply a closer fit between buyer and seller expectations.

“Although the rate of decline has moderated, we are still seeing values falling across most regions of Australia, and any recovery in dwelling values is likely to be a long-term outlook.”

Listing numbers for the combined capitals  are down 31 per cent relative to the same time last year, but haven’t been this high at this time of the year since 2012.

Outcomes

According to Mr Lawless, the prospect for lower interest rates is another factor that could support an improvement in housing market activity later this year.

“While borrowers are facing tougher serviceability assessments and scrutiny around their overall debt levels relative to their income and expenses, lower mortgage rates will certainly be a net positive for the housing market.

“Mortgage rates are already around the lowest level since the 1960s, and any further reduction is likely to be well received by the market.”

Mr Lawless also predicts that the federal election outcome could deliver a wildcard for the housing market.

“A change of government could see taxation policies relevant to the housing market rolled back or removed, which would be an overall negative for investment demand.”

According to the ABS, investors currently comprise only 18.2 per cent of the value of mortgage demand (excluding refis), down from 30 per cent in late 2014 and well below the decade average of 25 per cent.

“A further reduction in investment activity without a commensurate rise in owner-occupier activity would likely place further downwards pressure on housing prices, especially across the heavily supplied high-density sector of the market,” Mr Lawless said.

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