Housing market and Economic Update | Chart Pack August 2016

It’s time for our monthly whip around the country to see how our property markets are performing and to look at the factors affecting their future.

CoreLogic recently released their latest chart pack which gives us a good overview of what’s happening map australia country population state house property vic qld nsw tas wa nt

Aggregated data for the 8 capital cities indicate that dwelling prices bottomed out during May 2012 and have since expanded fairly consistently in all capitals apart from Perth and Darwin.

Overall, detached house prices increased by close to 40.0% across the eight capitals between May 2012 and July 2016.

The largest house price rise occurred in Sydney over this period (+65.7%), followed by Melbourne (+45.2%) and Brisbane (+18.6%).

In contrast, house prices in Perth and Darwin have fallen back since reaching their peaks in 2014.

Perth house prices have declined by 8.3% while Darwin house prices are down by 11.8%.

Of the cities that have experienced consistent price growth, Canberra has seen the smallest increase in house prices since the 2012 trough (+13.0%)

HERE’S SOME KEY POINTS FROM THEIR REPORT AND MY THOUGHTS:

Just to put things into perspective: the Australian property market is valued at around $6.6 Trillion and is significantly larger than all the listed stocks on our stock exchange and virtually 3 times bigger than our Superannuation Industry.

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Our property markets have slowed down:

Clearly our markets have entered the next stage of the property cycle, with capital growth slowing to a  much lower rate than in the last few years. 

The CoreLogic July Home Value Index results reported a 0.8 per cent rise over the month, taking capital city dwelling values 6.3 per cent higher over the first seven months of the year.

The first month of the new financial year saw another rise in capital city dwelling values, with the CoreLogic hedonic eight capital city aggregate index rising 0.8 per cent over the month to reach a new record high.

While values are still rising, four of Australia’s eight capital cities recorded a fall in dwelling values over the month.

Simultaneously, the rate of growth across the combined capitals aggregate index slipped back a notch after bouncing higher in April and May.

This graph gives an overview of the whole Australian market and we’ll look at how the individual State markets perform in a moment:

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The annual rate of growth, which hit a recent peak at 11.1 per cent across the combined capitals index in October last year, is now tracking at 6.1 per cent; the slowest annual rate of appreciation since September 2013. 10927901_l

July marks the 50th month of the combined capitals growth cycle, which commenced in June 2012.

Over the cycle to date, capital city dwelling values have risen by 38.3 per cent.

The recent moderation in the rate of capital gains should be viewed as a positive sign that growth in dwelling values may be returning to more sustainable levels.

However, the growth trend rate is still tracking considerably faster than income growth resulting in a deterioration of housing affordability.

The erosion in housing affordability is likely to be one factor working to slow housing demand across price sensitive market segments.

What the chart above doesn’t really show is who fragmented our  property markets are.

As you can see in the following graphic capital city vary greatly, with the Sydney property market the strongest market in Australia again.

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As the housing market moves through its fourth year of growth, several other measures are potentially indicating that buyers may be starting to gain some leverage in the market.

The number of dwelling transactions across the capital cities has been trending lower, with total dwelling sales over the most recent three month period now tracking 17.9 per cent lower than at the same time a year ago.

 

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THE RENTAL MARKET IS WEAK.

The recent fall in weekly rents has pushed capital city rental yields to a new historic low of 3.3 per cent with the Melbourne property market now recording the lowest gross yield for houses at 2.8 per cent, while Sydney now shows the lowest yield profile for units, averaging 3.9 per cent gross.

While low yields haven’t been enough to deter investors, if the pace of capital gains continues to trend lower, low rental yields are likely to lead to financing challenges due to tighter serviceability requirements and the impact on cash flow, not to mention a potential increase in rental supply resulting in higher vacancy rates.

 

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OTHER SIGNS OF OUR SLOWING PROPERTY MARKETS:

The average selling time is also pushing higher, with capital city dwellings now averaging 47 days to sell compared with 42 days a year ago.

Sydney properties are now selling in 40 days on average, which is two weeks longer than a year ago. 40327469 - graph of the housing market

As homes take longer to sell, vendors are starting to apply larger discounts to their asking prices.

Potentially, as buyers gain some leverage in the market and vendors become more flexible in their pricing expectations, this will assist in alleviating price pressures from the hottest markets such as Sydney and Melbourne.

Auction markets are yet to show a slowdown.

We’re seeing homes in the city taking longer to sell and vendors are starting to offer larger discounts on their asking prices in order to make a sale.

The typical Sydney home is now taking 40 days to sell compared with 26 days a year ago and discounting rates have risen from 5.5% a year ago to 5.6%.

 

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Listing numbers have also been reducing; however this is mostly due to fewer newly advertised properties being added to the market, which suggests that vendors are not quite as confident as they were a year ago.

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INVESTOR PARTICIPATION HAS FALLEN

APRA seems to have achieved what it wanted.

Investors, who were dominating our property markets last year, are now finding it difficult to get finance resulting in investor participation levels today being back around the average level for the last decade:

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The following graphs show lending growth to investors falling.

This is a leading indicator – a sign of what’s ahead (as investors generally obtain their finance pre approval is prior to purchasing) –  suggesting quieter times ahead for our property markets.

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WHAT’S HAPPENING AROUND THE STATES?

The Sydney property boom is over, but its fundamentals are still strong and after a slight retracement at the beginning of the year, Sydney’s price growth has resumed at a much more sustainable level:

 

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The Melbourne property market performed strongly over the last 12 months,  but this year capital growth has slowed to a more sustainable level.

Strong population growth (around 1.8% per annum) and a relatively strong economy creating more jobs have underpinned the Melbourne property market.

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Brisbane’s property market has confounded those “hot spotters” who were predicting it to be the  place to be this year.

While overall growth has slowed a little, the Brisbane market is very fragmented and there are still some areas that are performing respectably and have good investment prospects.

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Adelaide property values increased a respectable 4.8% over the last year, finally playing a little catch up.

The little flurry Adelaide experienced at the beginning of the year seems to have run its course and  house prices have only increased 9.9% over the last five years.

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The Perth property market is still in its slump phase with a significant oversupply of properties for sale and values still falling.

Similarly the oversupply of rental properties in Perth is causing rents to fall.

I believe there is still some downside to the Perth market as it works its way through the excesses  of the mining boom:

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Similarly there are few growth drivers for Hobart property prices,  and even though some commentators are suggesting it’s a good place to invest “because it has to catch up”, however with minimal population growth and slow economic growth there seems little reason for property values in Hobart to grow substantially.

While Hobart property values are 6.2% higher than 12 months ago, Hobart has underperformed over the last decade with property prices only increasing 15.5% over the last 10 years.

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Darwin property values are 7.6%  lower than they were 12 months ago, and like Perth, I believe there is more down side yet to come.

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The Canberra property market was destabilised by political uncertainty, but now the federal election has been and gone, yet the Canberra remains slow:

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ECONOMIC DATA REMAIN MIXED51170403_l

  • New lending to both investors and owner occupiers has fallen from recent peaks with investor lending recording a much greater decline
  • The rate of population growth has continued to slow due to fewer overseas migrants, with Victoria receiveing the highest percentage of migrants and this has helped fuel its proeprty markets.
  • Dwelling approvals continue to fall as builders and developers realise our markets are slowing
  • Consumer sentiment was more optimistic than pessimistic in June despite no interest rate cuts and a looming federal election
  • The unemployment rate has fallen a little further which is good for consumer confidence.
  • The Reserve Bank lowered interest rates again at the beginning of the month.

 

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An important factor affecting our property markets is consumer sentiment.

When we feel confident we tend to go out and spend, but when we fell less secure about our jobs or our future we tend to put off major purchase decisions like buying a new home or investment property.

While I expected consumer confidence to slowly pick up now that the result of the Federal Election has been confirmed, but this doesn’t seem to have happened yet.

As you can see from the graphs below, there is a strong correlation between consumer sentiment and dwelling sales and property value

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A positive sign for our property market is our jobs growth and low unemployment levels at a time when the participation rate (the percentage of the population working) has increased:

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Low mortgage rates (and the hint of another rate cut later this year or early next year) are also positive for property, but are another sign of the general weakness in our economy:

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Source of graphs: Corelogic

WHAT ARE YOU GOING TO DO?

The trend for capital growth has dropped from the peaks of 2015, but dwelling values continue to track higher across our capital cities other than Darwin and Perth, however the markets remain very fragmented. 6203158_l

If you’re looking for independent advice on how to build a property portfolio that will outperform the markets, no one can help you quite like the independent property investment strategists at Metropole.

There are still great property opportunities out there, but there are also more traps than ever.

Why not have a chat with the team at Metropole about your options.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.



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About

Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been once agin been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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