Pace of capital gains cools in April- Tim Lawless

After a surge in values over the first quarter of this year, April’s housing market results have shown a marked slowdown in capital gains with dwelling values only 0.3% higher over the month.

Dwelling values across Australia’s capital cities shifted down a gear in April, rising by just 0.3 per cent across the RP Data – Rismark combined capital city index.

The slowdown in the rate of capital growth comes after a very strong 2.3 per cent month-on-month rise in March and 3.5 per cent increase over the first quarter of the year.

Melbourne (-0.5 per cent) and Canberra (-1.1 per cent) values recorded a fall over the month while growth in dwelling values across the other capital cities ranged from 0.2 per cent in Perth and Hobart to 2.1 per cent in Adelaide.

Every capital city recorded an increase over the past three months with the largest capital gains being recorded in Darwin (5.1 per cent) and Sydney (4.1 per cent).

Since the housing market moved out of its correction phase at the end of May 2012, dwelling values across the combined capital city index have increased by a cumulative 16.1 per cent through to the end of April 2014.

The strong market conditions have sparked a new round of debate around the sustainability of recent rates of housing value growth and the impact on affordability for housing, particularly in Sydney and Melbourne.

The reduction in the rate of capital gains across the combined capital cities housing market brings growth back into a more sustainable range and will be a welcome relief for first home buyers.

A lower rate of capital gains in Sydney and Melbourne where dwelling values surged 22.5 per cent and 16.4 per cent respectively over the current growth cycle, may now signal that these markets are moving through their growth cycle peak.

However, we will need to see a few more months of data before we can establish whether a slowing trend is now evident in these cities. We have recently seen auction clearance rates move lower in both of these markets.

TL1

Rismark CEO Ben Skilbeck commented that while the Sydney housing market recorded yet another increase in April, it was the lowest rate of monthly growth since its run of 11 consecutive month-end increases commencing June 2013.

“The last time Sydney strung together 11 consecutive month-end increases was in November 2007 when the market added 14.7 per cent and before that in November 2002 when it delivered 19.6 per cent growth. The record for Sydney consecutive growth months was 12 recorded in Nov 1996,” Mr Skilbeck said.

The slowdown in housing value growth will likely be another factor that will help keep the Reserve Bank’s low interest rate setting in place.

The RBA has been keeping a close eye on the housing market, and while their commentary hasn’t signalled any housing market alarm bells, the lower rate of growth will be another signal that official interest rates don’t need to move higher.TL2

Sydney’s median house price has broken the $800,000 mark for the first time on record. The median house price in Sydney was recorded at a stunning $802,000 over three months ending April 2014, likely reflecting the increase in housing market activity at the more expensive end of Sydney’s housing market.

While median prices aren’t great for measuring the performance of the housing market, they are useful for understanding the relativity of housing prices from region to region. Sydney’s median house price is currently 30 per cent higher than Melbourne’s and 68 per cent higher than Brisbane’s.TL3“Relative to the national market, Sydney has a high share of expensive homes and it is this market segment that has outperformed in the recovery.

Over the past 12 months the divergence between the expensive and affordable ends of the market is evident with the most expensive 25% of the housing market increasing by 11.6 per cent as compared to 9.1 per cent for the most affordable 25% of the market,” Mr Skilbeck said.

[sam id=43 codes=’true’]Rental yields continue to suffer as dwelling values move higher at a faster pace than rental rates, particularly in those cities recording very high rates of capital growth. Over the past year capital city rents have increased by just 2.3 per cent while dwelling values are up by 11.5 per cent.

Gross rental yields on a typical Melbourne house are sitting at 3.3 per cent and Sydney gross yields are a bit higher at 3.7 per cent. Such a scenario of low yields in these two cities suggests that housing values have moved out of step with rental rates which is likely to dampen some of the investor exuberance we have seen in both of these markets.

I wouldn’t be surprised if Brisbane, where home values are much more affordable and rental yields are comparatively healthy, will start to see an increase in investor related demand based on Brisbane’s early stage in the growth cycle and comparatively healthy rental yields.

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Tim Lawless

About

Tim heads up the Core Logic RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia. Visit www.corelogic.com.au


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