In this market update I look at the latest Residex data on sales, capital growth and rent for the major dwelling markets across Australia.
Key findings include:
- Melbourne houses have outperformed Sydney in the October quarter.
- Melbourne houses have achieved their highest quarterly growth rate in 5 years.
- The Sydney market is slowing.
Cutting through the noise of the declining east coast market, we look deeper at how the east coast cycles work and how they may be affected by macro-prudential regulation.
Also discussed is the surprising growth in ACT houses and warnings against inter-state investment in a speculative market.
Table 1 shows the capital growth, rent and sales summary for October 2015.
Table 1: October 2015 Summary
Western Australia has experienced a significant drop in dwelling values and rental income in the year to October 2015 – in both the houses and unit markets of Perth and Country WA.
With commodity prices forecast to remain subdued, dwellings in Perth could experience a correction and may eventually stabilise above pre-mining boom levels.
The data also shows that houses in the ACT performed well in the year to October, however these statistics alone could be misleading.
A ‘boost’ in the ACT dwelling market followed the discovery of the dangerous exposure to asbestos in many homes.
By June 2015, the government had purchased back 600 homes, which also contributed to increased activity in this market.
This action reduced the supply of housing and forced people to participate in the housing market with the money received from the sale of their property to the government.
In spite of a strong statistical performance in ACT houses, capital growth in its unit market has remained close to zero since 2012.
Melbourne Overtakes Sydney in the October Quarter
Melbourne house price growth has outperformed Sydney in the quarter to October, by approximately 2.8 percentage points.
This suggests that the is coming into its peak growth rate.
The reason for this assumption is that the east coast markets historically follow a pattern; the Sydney property market will lead, followed by Melbourne and then Brisbane.
This can be seen in Graph 1.
Graph 1: East Coast Capital Growth
An obvious example of this lead lag effect can be seen between 2003 and 2004 when growth in Sydney experienced a sharp decline, followed by Melbourne and then Brisbane.
The latest data indicates that Sydney has peaked in this particular growth cycle.
Sydney houses are still increasing in value but the current quarterly growth rate (4.04%) is significantly lower than the 7.58% achieved in the July quarter this year.
The data shows that Melbourne is now following Sydney’s lead in terms of strong capital growth.
The Melbourne house market achieved the strongest quarterly growth figure out of all capital city markets, at 6.84%.
The median house value now sits at $729,500.
Cyclically, Melbourne capital growth should cool in a few months then the Brisbane property market may experience a peak in capital growth after that.
Seasonally, summer should see lower growth rates, particularly in Brisbane where the market is susceptible to seasonality.
Structurally, however, growth in Melbourne and Brisbane may be limited by Australian Prudential Regulation Authority (APRA) intervention to curb investor home loans.
Invesment: The New Normal
Before APRA intervention, low interest rates enabled existing home owners with strong purchasing power.
This was due to being able to access any built up equity to fund a deposit on another property purchase, rather than aspiring home owners having to overcome a deposit hurdle.
This means any time property values in Sydney went up, purchasing power for existing home owners went up.
The ability to use equity in an existing property to bid on another created a strong wealth effect for people who were asset rich.
Housing finance data from the ABS shows a significant drop off in investor lending from a peak of $15.50 AUD billion in June to $12.53 AUD billion in September.
This follows the implementation of restrictive lending policies to investors, as APRA required lending institutions to hold more capital against increasingly risky home loans.
Graph 2: Investor Home Loans – Original Dollar Amounts
Source: ABS Catalogue Number 5609.0 – Housing Finance, Australia, Sep 2015
The median Sydney house is now valued at $1,058,000.
Anecdotal evidence suggests that first home buyers, particularly in Sydney, are now entering the market as investors because this is the only way they are able to afford property – having a tenant help pay off the mortgage.
With home loan rates and deposit requirements increasing, those choosing to invest may turn to other capital city dwelling markets.
It is worth considering the impact this trend could have on more affordable markets across Australia.
Could investors who are out-priced of Sydney, who are investing in other cities, in turn out-price locals in these other markets?
Sydney has one of the highest median household incomes across the capital cities at over $80,000 per annum.
Couple this with the ability to take equity out of highly valued Sydney properties and it is easy to see how Sydney investors could drive up prices in other cities through speculation.
However, an area does not hold long term growth prospects just because it is relatively affordable and others have started investing there.
This is especially the case where macroeconomic growth prospects over the next 12 months are not strong.
Across Australia, wage growth is low at 2.3% for the September quarter and unemployment has come down to 5.9% for October – but remains high relative to the 10 year average (5.2%).
This has implications for both dwelling affordability and the amount of rental income tenants can afford to provide for investment properties.
Those hoping to invest interstate may keep this in mind as they commit to markets that are driven largely by speculative growth.