Growth in the Melbourne house market has outperformed Sydney by 2.8 percentage points in the October quarter – with 6.84% growth.
The latest data shows that Melbourne is now following Sydney’s lead in terms of strong capital growth – with the median house value now sitting at $729,500.
This result suggests that Melbourne is coming into its peak growth rate, as the east coast markets historically follow a pattern – Sydney will lead the market, followed by Melbourne and then Brisbane. This can be seen in Graph 1.
Graph 1: East Coast Capital City Growth
Looking at Graph 1, an obvious example of the lead lag effect can be seen between 2003 and 2004 when growth in Sydney experienced a sharp decline, which was followed by Melbourne and then Brisbane.
Cyclically, Melbourne capital growth should cool in a few months then Brisbane may experience a peak in growth following this. The summer months should see lower growth rates, particularly in Brisbane where the market is susceptible to seasonality.
Structurally, however, growth in Melbourne and Brisbane may be limited by Australian Prudential Regulation Authority (APRA) intervention to curb investor home loans.
Table 1 presents the results for October.
Table 1: October Statistics Summary
The data indicates that Sydney has peaked in this particular growth cycle. While houses in this market are still increasing in value, quarterly growth in October (4.04%) was significantly lower than the 7.58% achieved in the July quarter.
Western Australia has experienced a significant drop in dwelling values and rental income in the year to October 2015 – in both the house and unit markets of Perth and Country WA. With commodity prices forecast to remain subdued, dwellings in Perth could experience a correction and may eventually stabilise above pre-mining boom levels.
The data also shows that houses in the ACT performed well in the year to October, however these statistics alone could be misleading.
A ‘boost’ in the ACT dwelling market followed the discovery of the dangerous exposure to asbestos in many homes. By June 2015, the government had purchased back 600 homes – which also contributed to increased activity in this market. This action reduced the supply of housing and forced people to participate in the housing market with the money received from the sale of their property to the government.
In spite of strong growth performance in the ACT house market, unit growth has remained close to zero since 2012.
Investment: The New Normal
Before APRA intervention, low interest rates enabled existing home owners with strong purchasing power. This was due to being able to access any built up equity to fund a deposit on another property purchase, as opposed to aspiring home owners having to overcome a deposit hurdle.
Related Article: What to do When You’re Priced Out of a Market
This means that any time property values in Sydney went up, purchasing power for existing home owners in this market also went up. The ability to use equity in an existing property to bid on another created a strong wealth effect for people who were asset rich.
Housing finance data from the ABS shows a significant drop off in investor lending – from a peak of $15.50 AUD billion in June 2015 to $12.53 AUD billion in September 205. This follows the implementation of restrictive lending policies to investors, as APRA required lending institutions to hold more capital against increasingly risky home loans.
Graph 2: Investor Home Loans
Source: ABS Catalogue Number 5609.0 – Housing Finance, Australia, Sep 2015
The median Sydney house is now valued at $1,058,000. Anecdotal evidence suggests that first home buyers, particularly in Sydney, are now entering the market as investors because this is the only way they are able to afford property – using tenants to help pay off their mortgage.
With home loan rates and deposit requirements increasing, those choosing to invest may turn to more affordable capital city markets. With this in mind, it is worth considering the impact this trend could have on these other more affordable markets.
Could investors who are out-priced of Sydney, who are investing in other cities, out-price locals in these other markets?
Sydney has one of the highest median household incomes across the capital cities at over $80,000 per annum. Combine this with the ability to take equity out of highly valued Sydney properties and it is easy to see how Sydney investors could drive up prices in other cities through speculation.
It is important to remember that an area does not hold long term growth prospects just because it is relatively affordable and people have started investing there. This is especially the case where macroeconomic growth prospects over the next 12 months are not strong.
Across Australia, wage growth is low at 2.3% for the September quarter and unemployment has come down to 5.9% for October – but remains high relative to the 10 year average (5.2%). This has implications for both dwelling affordability and the amount of rental income tenants can afford to provide for investment properties. Those wanting to invest interstate should keep this in mind as they commit to markets that are largely driven by speculative growth.
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Eliza Owen is the Market Analyst for Onthehouse.com.au.
Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.