RP Data and Rismark International today released housing market results for September where the combined capital cities index recorded a 1.6 per cent rise over the month.
The latest data release marks what RP Data research director and analyst Tim Lawless has described as a ‘technical’ recovery in the housing market with the RP Data – Rismark Combined Capital City Index moving 0.7 per cent higher than the previous record high which was last recorded back in October 2010.
Based on the combined capitals index, capital city dwelling values fell by 7.4 per cent from the October 2010 market peak to the May 2012 trough. Since the beginning of June 2012, capital city dwelling values have increased by 8.7 per cent through to the end of September 2013.
According to Mr Lawless, the September gains were primarily fuelled by Australia’s two largest housing markets, Sydney and Melbourne, where residential property values in each city were up by more than 2 per cent over the month.
“Sydney home values were 2.5 per cent higher over the month and are up 5.2 per cent over the September quarter while Melbourne values have seen a similar 2.4 per cent month-on-month gain and a 5.0 per cent quarterly lift. We haven’t seen market conditions this strong since April 2009 for Sydney and May 2010 for Melbourne,” Mr Lawless said.
While Sydney and Melbourne dwelling values powered higher in September, most other capital cities are recording much more subdued housing market conditions. Dwelling values moved lower in Brisbane (-0.3%), Perth (-0.1%), Hobart (-2.0%), Darwin (-2.5%) and Canberra (-0.7%), whilst Adelaide values posted a 1.1 per cent capital gain over the month.
According to Mr Lawless, the latest housing market data is likely to be closely scrutinised by policy makers.
“Any debate about unsustainable growth in housing markets should be very much focussed on Sydney and Melbourne. Most other capital city housing markets are in fact showing only a modest growth trend.
Perth’s housing market, which was previously the stand out for capital gains, has seen dwelling values rise by just 1.3 per cent over the September quarter while Brisbane’s housing market remains sluggish, with values up only 1.1 per cent over the past twelve months.”
Another important factor to note when considering the current rate of capital gains is to look at the longer history of capital gains. According to Mr Lawless, “Sydney dwelling values have appreciated by just 2.5 per cent per annum over the past decade which is less than annual rates of inflation and wages growth over this period. Sydney’s annual average rate of capital gain over the past ten years is actually the lowest of any capital city.”
“The Australian housing market is broadly in the middle of a healthy growth phase, however if the growth trend in Sydney and Melbourne continues at the same pace into 2014, then there may be some cause for concern. At the current quarterly pace of growth, capital gains in Sydney and Melbourne are running at an annualised rate of around 20 per cent which is approaching the highs of previous growth cycles. While this scenario is unlikely to occur, if such a high rate of growth continued for a sustained period, it would have the potential to push home values above what might be considered sustainable market value,” Mr Lawless said
Rismark CEO, Ben Skilbeck added “It is common for some cities to experience strong bursts of growth while other cities remain relative subdued, however, annualising short quarterly bursts rarely provides growth illustrative of what occurs over the longer term. For example, the first calendar quarters of 2009 and 2010 for Sydney had 6.0 per cent and 5.1 per cent growth, respectively. If one annualised these figures they’d have arrived at 26 per cent and 22 per cent respectively, however, the actual growth for 2009 was a far less 14 per cent and for 2010 was just 6 per cent. Given that the 5 Capital city aggregate index has only just recovered its previous declines and Sydney’s 10 year compound growth is only 2.5 per cent, calls of unsustainably high property prices are currently premature.”
According to Mr Lawless, capital gains have been skewed towards the detached housing market rather than medium to high density housing. House values across the combined capital cities have moved 5.7 per cent higher over the past twelve months while unit values are up a lower 4.4 per cent. He said that the higher growth trend for houses is hard to reconcile.
“With houses much more expensive than units, affordability constraints are mounting for detached homes. Additionally gross rental yields are generally higher for units compared with houses. I would have expected a stronger performance from unit markets considering these factors and the fact that investors, who have become more yield focussed, are so active in the market. Adelaide is the only capital city where unit markets have returned a higher level of growth than houses over the past twelve months.
“Strong levels of investor activity is one of the key factors that are driving current market conditions with ABS housing finance data indicating the value of investor related mortgage demand comprises about 36 per cent of the market, which is higher than the long term average of 34.4 per cent. We may see may some natural dampening of investor activity as rental yields begin to erode.[sam id=38 codes=’true’]
“The natural consequence of strong capital gains is that rental yields start to evaporate; there is already evidence of this taking place in both Sydney and Melbourne as growth in dwelling values outpaces growth in weekly rents. Sydney dwellings are currently returning a gross rental yield of 4.2 per cent, down from a recent high of 4.5 per cent, while Melbourne remains the lowest yielding capital city. The typical Melbourne dwelling is providing a gross rental yield of just 3.6 per cent, down from a recent high point of 3.8 per cent only a few months ago. Lower investment yields may act to organically dampen investor exuberance in these markets,” Mr Lawless said.
According to Mr Skilbeck, consistent with houses outperforming units, when the market for all dwellings is broken into price ranges, the more expensive upper quarter by price is beginning to outperform the mid and lower range. For the month of September, the top quartile across Australia grew at 1.7 per cent compared to the mid price band at 1.5 per cent. Likewise, over the quarter ended September, the upper quartile grew at 3.9 per cent while the mid range grew at 3.5 per cent.”
Both RP Data and Rismark reported that based on recent data flows it looks quite clear that capital gains are set to continue through Spring. The preliminary auction clearance rate in Melbourne and Sydney last week was again over 80 per cent and homes are selling rapidly with less vendor discounting. RP Data’s Mortgage Index, which tracks mortgage related activity across valuation platforms, was more than 6 per cent higher over the past four weeks indicating that mortgage demand is continuing to rise as well.
“One of the most positive outcomes of the strong housing market conditions is the flow on effects for new housing construction. We have already seen a trend towards more dwelling approvals and more credit demand for newly constructed homes. In fact, based housing finance commitments data to July, mortgage commitments for new housing was 52 per cent higher than a year ago; the highest number of commitments for newly constructed homes since the late seventies. An uplift in the new housing sector is exactly what policy makers are hoping to see from the low interest rate setting,” Mr Lawless said.