Australian Housing Market Conditions Report

by Ed Chan
in Economy Property Investment Property Market Updates
16/10/2016

Below you will find a report and a series of NAB and CoreLogic videos on housing market conditions around Australia. This month they are focussing on how the housing market performed in August, which of course coincided with the second time interest rates were cut during 2016.

Image Source: terrameridiana.com

What effect has Low Interest Rates had on Australian Housing Markets?

The August rate cut was the 12th since November 2011. Since that time, the Australian cash rate has reduced by 325 basis points to reach 1.5%; the lowest interest rate reading on record. Importantly for the housing market, mortgage rates haven’t reduced by the same amount, with the average standard variable mortgage rate down 255 basis points over the same time, taking the typical standard variable mortgage rate to 5.25% and the discounted rate to 4.45%. Mortgage rates haven’t been this low since 1960, which is likely to be one of the factors driving dwelling values higher.

It’s not just low interest rates that are pushing dwelling values higher in Australia. If it were, we would be seeing much more uniform growth rates across the capital cities and regional areas of the country. In fact, the performance of housing markets has been diverse across Australia. Most capital city housing markets are only showing subtle growth trends, while Sydney and Melbourne have stood out based on their substantially higher rates of capital gains over the past two cycles.

Australian Housing Market Update – presented by NAB and Corelogic

The current growth cycle kicked off in the middle of 2012 across most cities. Since that time Sydney dwelling values have increased by 64% and Melbourne values are up 44%. The next highest growth rate over the same period has been in Brisbane where dwelling values are 18% higher. The lowest growth rates over the cycle can be found in Perth and Darwin, where dwelling values have increased by 8.2% and 9.7%, however, despite values rising over the cycle, housing values have been falling in these cities since 2014.
Other factors apart from low mortgage rates can explain the strong growth conditions that are evident in Sydney and Melbourne. Both cities have benefitted from strong jobs growth, low unemployment and high migration rates from both overseas and interstate.
Additionally, low advertised stock levels are likely adding to some buyer urgency in these cities. Listing numbers in Sydney and Melbourne have started to trend higher as they do each Spring, but overall listing numbers remain well below the long term average levels.
While growth conditions remain strong in Sydney and Melbourne, the annual trend rate of growth has been tapering since the middle of last year. Sydney’s housing market moved through a peak annual growth rate in July last year at 18.4%. The annual pace of growth has since moderated back to 9.4% over the twelve months to August. Similarly, growth in Melbourne has fallen from a 2015 peak of 14.2% to reach 9.1% over the past twelve months.
Not all cities are seeing a decelerating growth trend.The housing market in Canberra and Hobart have both gathered some pace over the past twelve months. A year ago the annual trend rate of growth in Canberra was down almost 1% over the year. Over the past twelve months the annual growth rate has picked up to 7.6%. Similarly, Hobart’s annual rate of capital gain has shifted from just 1.5% a year ago to reach 6.5% over the past twelve months.
A more subtle growth trend is evident in Brisbane and Adelaide where dwelling values are up 4.4% and 3.1% over the past twelve months, while values continue to fall in Perth and Darwin where economic and demographic conditions have weakened.

Let’s take a closer look at each of the capital cities.

Sydney Property Market Update

Sydney’s housing market has seen dwelling values surge higher compared with the other capital cities. Dwelling values across Australia’s largest city were up 9.4% over the past twelve months. While this is a high rate of growth, the annual pace of capital gains has virtually halved since July last year when dwelling values were rising by 18.4% per annum. Up until recently, there was little difference between growth in house values compared with unit values, however the most recent three month period has seen house values accelerating away from unit values. The over performance in the detached housing sector may be attributable to higher supply levels associated with the unit market as well as ongoing strong demand for detached housing while supply levels have remained constrained.

Melbourne Property Market Update

Melbourne dwelling values have continued a strong run of capital gains, with values moving 1.5% higher in August and 3.4% higher over the most recent three month period. Melbourne houses are continuing to show a substantially higher growth trend than units. Over the past twelve months, Melbourne house values are up 9.7% while unit values have increased by less than half that amount, rising 4.1%. Concerns around unit oversupply are generally confined to specific inner city areas of Melbourne, however it appears the broader unit market is suffering from a spill over in negative sentiment relating to these supply concerns.

Brisbane Property Market Update

The Brisbane housing market has struggled to gather any pace, with value growth in the city continuing to lag well behind Sydney and Melbourne. Similar to Melbourne, Brisbane’s unit market is tracking much softer than the detached housing market with unit values falling by 0.4% over the past twelve months compared with a 4.9% rise in house values. New housing supply has been very much skewed towards apartments across the Brisbane region, with detached housing generally remaining undersupplied. The market fundamentals in Brisbane continue to look very positive despite the comparatively weak growth profile. Rental yields remain amongst the highest of any capital city and affordability is far less of an issue than it is in the larger capitals. The overall performance of the Queensland and Brisbane economy is the main factor holding back stronger value growth.

Adelaide Property Market Update

Adelaide has continued to show a steady and sustainable trend of capital gains, despite a weak result in August with dwelling values falling by 1% over the month. The annual trend has seen dwelling values rise by 3.1% with most of the growth concentrated in the detached housing sector. Unit values have remained relatively flat over the year, recording a growth rate slightly below 1%. The average selling time across Adelaide has held reasonably firm over the past year at 55 days compared with 56 days a year ago, however discounting rates have started to slip suggesting that vendors are becoming slightly more flexible on their pricing expectations.

Perth Property Market Update

The Perth housing market remains relatively soft, with dwelling values down 4.2% over the past twelve months. The August data actually showed a subtle rise in Perth dwelling values, however we will need to see more consistent positive month to month increases before suggesting the Perth market has bottomed out. Listing numbers remain high across Perth and the average selling time, at 74 days, suggests that Perth remains a buyers’ market. While dwelling values are slipping lower, Perth rental rates are showing a more substantial downturn, with dwelling rents down 9.4% over the past year. The weak rental conditions are also pushing gross rental yields lower.

Hobart Property Market Update:

Hobart’s housing market has started to show a consistent upswing, with dwelling values rising 6.5% over the past twelve months. The most recent twelve month period represents the strongest capital gain conditions since 2010. The strong growth conditions are accompanied by reasonably high rental yields as well, which may provide some incentive for investors looking for a healthy balance of capital gains and rental return. Despite the recent run of capital gains, Hobart remains the most affordable capital city housing market by a large margin. The total number of advertised homes for sale is substantially lower than it was a year ago and the shortage of stock for sale is a likely major factor in the strengthening value growth for the city.

Darwin Property Market Update:

The reading on Darwin dwelling values has been somewhat volatile, however peering through the noise suggests the housing market remains soft. The past twelve months have seen Darwin dwelling values fall by 4.2%, however there has recently been some improvement in the number of transactions across the Darwin market, with year on year dwelling sales rising by 2.5%, perhaps providing an early indicator that the market is moving through its low point. Discounting rates and average selling times remain high, so buyers still hold a great deal of leverage over sellers in this market.

Canberra Property Market Update

Canberra’s housing market has been on an improving growth trend during 2016, with dwelling values rising 7.6% over the past twelve months. At the same time a year ago Canberra dwelling values were down nearly 1% over the twelve month period. The recovery in growth is being completely driven by detached houses rather than units, with detached house values increasing by 8.3% over the past year compared to a 1.6% fall in unit values. Year on year transaction numbers have also moved higher, however the growth is concentrated entirely within the detached housing sector while unit transactions remain 2.2% lower compared with a year ago and unit values are 1.6% lower over the year.

What can are the main take-aways from this report?

Overall the common thread across the Australian housing market is diversity. While the headline growth figures remain robust, it is very clear that capital gain conditions vary remarkably from region to region and across the types of housing.
Transaction numbers are trending lower which, at face value, may suggest some weakening of demand. Nationally there were 15% fewer sales across the housing market over the past twelve months.
Digging a bit deeper and it is likely that lower transaction numbers aren’t entirely attributable to less demand from buyers. While a reduction in housing demand is a likely explanation in weak markets like Perth and Darwin, the same can’t be said for Sydney and Melbourne where values are still rising at a strong pace.
These areas continue to show a low number of homes being advertised for sale which is likely creating some level of urgency amongst buyers which is supporting the upwards pressure on prices. Total listing numbers in Sydney remain below 20,000 and the number of newly advertised properties added to the market last month was about 21% lower than a year ago.
As the spring selling season starts to ramp up, we would expect listing numbers to also start their typical seasonal upswing. Whether this increased supply is absorbed by the market will be important to monitor as the season progresses.
If listing numbers do rise without a commensurate lift in buyer demand, we may see some further moderation in the strong value growth that has been evident in Sydney and Melbourne over the past four years.
Affordability barriers are likely to progressively add some natural resistance to housing demand if values continue to rise. With wages growing at the lowest rate on record it is hard to imagine this pace of dwelling value growth could continue much longer, at least in Sydney where the dwelling price to income ratio is tracking at a record high of 8.4.
Another likely brake on the market will be higher supply levels from newly constructed housing. Dwelling approvals data for July showed another surge in apartment approvals at a time when the number of high-rise apartments under construction is well and truly already at historic highs. While concerns around apartment supply are confined to specific areas, particularly across the three largest capitals, it is clear that high unit supply is weighing down the pace of capital gain in this sector of the market.

In summary, Australia’s housing market continues to demonstrate a strong level of resiliency in this record low interest rate environment, despite the many moving parts and somewhat divergent underlying trends. However there are some headwinds that may prevent growth rates from re-accelerating, even if interest rates do move even lower later this year.

We would like to thank NAB and CoreLogic for supplying this report.
Ed Chan

Read other posts by Ed Chan

National Housing Market Report: ‘Mixed Bag’ performance for Australian Capital Cities