Sydney and Melbourne benefit the most from mortgage rate drops

The property markets to benefit the greatest since mortgage rates began to drop in 2011 have been Sydney and Melbourne.

In today’s CoreLogic RP Data Weekly Property Pulse, I look at why our largest capital city markets are in the limelight as the biggest benefactors of current market conditions, and why other cities are far less impacted.

A reduction in official interest rates coupled with subsequent cuts to mortgage rates, are largely responsible for home value growth.

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To set the scene, I looked at how official interest rates were positioned at the beginning of 2008 and before the financial crisis really hit.

At the end of 2007, the cash rate was recorded at 6.75 per cent and rose to 7.25 per cent between March and August 2008.

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The Findings:

  • By the end of the year, the cash rate was slashed to 4.25 per cent and dropped even lower, reaching 3.0 per cent in April 2009, and remained stationary until the RBA started to once again lift rates in October 2009;
  • By November 2010 official rates had reached 4.75 per cent and remained there until October 2011.
  •  In November 2011 the RBA cut the cash rate by 50 basis points over the last two months of 2011, and by a further 125 basis points in 2012, 50 basis points in 2013 and finally another 25 basis points in February this year to bring the cash rate to its current level of 2.25%.

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In 2008 home values fell across all capital cities with the magnitude and the length of decline varying between cities.

Across the combined capital cities, home values peaked in March 2008 and fell by -6.1 per cent to their lowest point in December 2008. Sydney (-6.2%), Melbourne (-8.3%) and Perth (-6.2%) recorded the greatest falls.

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Ever since the end of 2008, Sydney and Melbourne have recorded the strongest increases in home values.

Across the combined capital cities, home values increased by a cumulative 37.9 per cent since the beginning of 2009, however, Sydney (56.9%) and Melbourne (51.8%) have led the way with Darwin a distant third strongest performer (24.0%).

With interest rates much the same around the country, why is the growth so much focused on Sydney and Melbourne?

The two largest cities have seen a significant increase in employment since the beginning of 2009.

Sydney has created 3,045 new jobs a month over the period and Melbourne has created 3,511/month.

Job creation in Perth (2,606/month) has also been strong while cities such as Brisbane (1,090/month), Adelaide (386/month) and Hobart (24/month) have seen much softer job creation over the period.

Greater job creation coupled with most corporations headquartered in either Sydney or Melbourne, is a likely contributor to the growing housing demand in these cities.

NSW and Victoria have consistently attracted the greatest number of overseas migrants but migration has been particularly strong since the financial crisis.

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While job creation and overseas migration in NSW and Vic has been strong since the end of 2008, NSW and Victoria have also been losing far fewer residents to other states.

NSW and Victoria have typically recorded a net outflow of residents to other states; however, since December 2008 Victoria has consistently recorded a positive inflow of residents and is currently at a record high net gain. NSW still records a net outflow of residents but its outflow is at a record low.

As a result, Qld in particular, is seeing far fewer interstate migrants.

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Lower interest rates have certainly contributed to growth in home values in Sydney and Melbourne – however they haven’t exclusively driven growth.

In fact job creation and demographic factors along with associated retail spending have also contributed to the much stronger growth in these cities compared to all other Australian capital cities.

Demographics are favourable for housing demand in these cities and lower interest rates will likely further encourage an increase in demand and subsequent home value rises.



Want more of this type of information?


Cameron Kusher

About

Cameron Kusher is Corelogic RP Data’s senior research analyst. Cameron has a thorough understanding of the fundamentals such as demographics, trends & economics. Visit www.corelogic.com.au


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