Yesterday I explained that after showing strong conditions through to September, the final quarter of 2015 ends with capital city dwelling values declining by 1.4%
Today I will look at several key property market influencers and share my analysis including performance of varying property types as well as yields and returns and a five year market retrospective – 2010 to2015 and some thoughts about 2016.
But first some…
Highlights over the three months to December 2015
- Best performing capital city: Brisbane +1.3 per cent
- Weakest performing capital city: Sydney -2.3 per cent
- Highest rental yields: Hobart houses with gross rental yield of 5.4 per cent and Brisbane Units at 5.3 per cent
- Lowest rental yields: Melbourne houses with gross rental yield of 3.0 per cent and Melbourne units at 4.0 per cent
- Most expensive city: Sydney with a median dwelling price of $800,000
- Most affordable city: Hobart with a median dwelling price of $350,000
Performance across product types
Surprisingly, across the combined capitals index, there was little difference between the capital gain of detached housing versus apartments over 2015, despite detached housing showing a stronger performance than apartments over most of the year.
The amount of new apartment supply under construction hasn’t materially affected the rate of capital gain, at least at the macro level, however in cities like Melbourne and Brisbane, where new apartment supply has surged relative to historic levels, the difference in performance is more substantial.
In Melbourne, unit values are up 6.9% over the year compared with an 11.7% rise in house values, while in Brisbane, apartment values have increased by only 1.8% compared with a 4.3% rise in house values.
Sydney, where the apartment market is more mature and new supply has been more geographically diverse, has shown hardly any difference in capital gains, with house values up 11.5% compared with an 11.3% rise in unit values.
Yields and total return
The only capital city to see gross rental yields improve over the year has been Hobart, where the average gross yield rose from 5.3% to 5.4%.
Every other city has seen yields compress due to dwelling values rising at a faster pace than rental rates, or, as in the case of Perth and Darwin, rental rates falling at a faster pace than dwelling values.
In Sydney and Melbourne, where the rate of capital gain has been substantially higher than other capital cities, yields sunk to new historic lows during 2015.
The lowest gross yields can be found in Melbourne, where the typical gross yield on a Melbourne home reached a historic low of 3.0% before improving slightly over the final two months of the year to reach 3.1%.
Similarly, in Sydney, gross yields reached a historic low of 3.3% before showing a slight recovery to end the year at 3.4%.
The highest yields for detached houses can now be found in Hobart, where the typical house is providing a gross yield of 5.4%.
Brisbane is now home to the highest gross rental yields for units, averaging 5.3% in December.
Despite the low yields being achieved in Sydney and Melbourne, the high rate of capital gain has provided substantially higher total returns that other capital cities.
Combining the return from both capital gain and yield shows Sydney investors would have seen an average total gross return of 15.4% over the year, while home owners in Melbourne have seen a 14.8% total gross return.
At the other end of the spectrum, the total return in Perth was just 0.2% over the year and in Darwin, the total gross return was a low 2.0%.
By factoring in holding costs and other expenses, it’s easy to see that total net returns would likely have been negative in each of these cities.
5 Year Retrospective
The past five years takes into account the previous downturn in housing markets that ran from late 2010 through to the middle of 2012, as well as the current growth phase which broadly commenced in June 2012.
Across the combined capital cities index, dwelling values have recorded an aggregate capital gain of 22.5% over the past five years; in dollar terms this equates to an increase of approximately $108,000 in every dwelling across the capital cities.
Highlighting the two-tiered nature of housing market conditions over the past five years, at one end of the growth spectrum is Sydney and Melbourne, where dwelling values have increased by 42.1% (approx. $227,580) and 20.7% ($101,650) respectively.
The remaining capital cities have all seen value appreciation of less than 6.5% over the same time frame. Brisbane was the third best performing capital city with dwelling values increasing by 6.3%, Canberra values are 5.6% higher, Perth is up 5.0% and Adelaide values are 1.9% higher over five years.
Values in Hobart and Darwin are actually lower than they were five years ago, down by 4.0% in Hobart and 3.7% lower in Darwin.
The substantial equity created in Sydney and Melbourne housing is likely to have further positive economic influences as that capital is redirected towards other investments or asset classes.
With some mature aged couples and individuals placing their retirement plans on hold in the wake of the GFC, many have seen their wealth rebuilt via a strong housing market and partial recovery in equities markets.
We are already seeing iconic lifestyle markets like Cairns, theGoldCoast, Sunshine Coast and Byron Bay regions bouncing back and recording strong housing market conditions after ongoing weakness between 2008 and 2014.
The Outlook for 2016
As we move into 2016, it is clear that the strong housing market conditions of 2015 have softened over the final months of the year, setting the scene for more sedate conditions in the New Year.
Interest rates are likely to remain at their current historically low setting, which will continue to stimulate housing demand, however migration rates are continuing to taper which will offset some of this housing demand, particularly in the mining regions, which were previously benefitting from strong rates of migration from both overseas and interstate.
Clearance rates in Sydney and Melbourne slipped from the high 80% mark around the middle of last year to the low 60% range in December.
Listing numbers are rising, homes are taking longer to sell and value growth has slowed sharply in Sydney and Melbourne, which were the primary drivers of growth over the recent growth cycle.
Throughout 2016 we may see further moderate value declines in the Sydney and Melbourne property markets, however considering population growth has remained strong in these areas and economic conditions are very healthy in these cities, we would be surprised if dwelling values fell materially before conditions start to level.
The city that is showing the most promise for capital gains in 2016 is Brisbane, or for that matter, the broader South East Queensland region.
Yields are much higher compared with Sydney and Melbourne, the rate of capital gain has been moderate but sustainable to date, and affordability is far superior to the two larger cities as well.
Interstate migration remains positive into Queensland and may start to improve with the higher rate of job creation over the past year.
The Canberra housing market has also been showing tentative signs of growing values along with Hobart however, market conditions have been more volatile from month to month in these areas.
The regions that are likely to underperform are those associated with a higher degree of economic uncertainty.
The Darwin and Perth housing markets peaked in late 2014 and both home values and rental rates have fallen over the past year.
The rate of decline may start to ease in these cities; however growth prospects are likely to be at least a year away in these markets.
The Adelaide housing market has remained relatively steady over the year, with values virtually unchanged in 2015.
However, as the automobile manufacturing sector continues to wind down in the region, coupled with the soft resources sector, the economic outlook for the city isn’t likely to have a positive influence on housing market conditions in the area.
Along with the many other economic variables and factors, the changing regulatory environment is yet another factor likely to influence the market in 2016, particularly proposals released just prior to Christmas by the Basel Committee to levy higher capital on investment