The RP-Data Rismark Home Value Index reported its first month on month fall in May after capital city dwelling values consistently rose over the previous eleven months.
The extent to which the May decline was a seasonal factor has been a key topic across the media; generally the month of May is a seasonally weak time for housing markets and no doubt the most recent result suggests that was the case again this year.
When we adjust our index for seasonality the May numbers are still down 1.2% compared with a 1.9% fall in the original index reading.
When we take the adjusted reading and also look at trend rate of growth over a rolling three month period it becomes increasingly evident that the Australian housing market has probably moved through the peak of its growth phase.
In fact, the quarterly rate of growth peaked back in June of last year at 1.9% in original terms and has since trended progressively lower.
A few other factors are lining up to suggest the housing market may be cooling. Consumer sentiment, which shows a high correlation with housing demand, peaked in September last year.
After the index tumbled in May as consumers reacted pessimistically to the May budget announced the consumer sentiment reading is down 16 percent from the recent peak reading. Historically buyer demand tends to move with consumer confidence readings; when consumers are confident they are generally much more willing to make a high commitment decision such as purchasing a property.
We have also seen some softening in our vendor metrics.
Auction clearance rates peaked in February this year at 76% and last week were recorded at a still healthy but lower 66%.
Vendor discounting eased ever so slightly in April, rising from 5.4% to 5.6% in April.
And the average selling time showed a modest increase, rising from 36 days to sell the typical capital city property to 37 days (which is still a historically low reading).
Another factor that is likely to be dampening housing market conditions is affordability and the ratio of rental prices to dwelling prices. Value growth has substantially outpaced rental growth which means purchasing a home is becoming substantially more expensive than renting.
Over the past five years Sydney dwelling values have increased by 32.5% while rents are up 25.7%. Similarly, in Melbourne values are up 26.9% over the past five years while rents are up a much lower 16.2%. Both cities have seen investment yields move substantially lower to be the lowest of any capital city.
While value growth in the housing market may be moderating across combined capital cities, it’s important to remember that each city and region is at a different stage of the growth cycle.
While Melbourne, Sydney and Perth appear to have moved through the peak of their cycle, momentum seems to have gathered some pace in those markets where growth conditions have previously been more sedate than the larger cities.
Brisbane, where transaction numbers are more than 20% higher over the March quarter compared with the same period a year prior, has seen a pick-up in the rolling quarterly pace of growth while Adelaide and Hobart have also showed some evidence improving market conditions. Historically these capital cities have lagged behind Sydney and Melbourne in market growth phases.
We don’t believe that the falls recorded in May are set to continue however, a slower rate of growth over the coming months is likely. The real test for the market will be throughout the spring selling season where sales and listings ramp up once again.
Given the housing market began this year with momentum it seems unlikely that value growth will return to the highs recorded over the second half of 2013.