Latest Stats: Property Prices Continue To Rise

Dwelling prices have risen by a further 0.3 per cent in February taking home values 8.3 per cent higher over the past twelve months, according to the CoreLogic RP Data February Home Value Index results.

Dwelling values continued their upwards trajectory over the month of February by recording a 0.3 per cent gain over the month.download

This now takes combined capital city dwelling values 2.5 per cent higher over the rolling quarter and 8.3 per cent higher over the twelve months to the end of February.

Over the past twelve months the CoreLogic RP Data Index shows dwelling values across the eight capital city aggregate index are up 8.3 per cent.

Sydney is once again the clear standout with dwelling values 13.7 per cent higher while Melbourne values are 7.4 per cent higher.

Australia’s third largest city, Brisbane, recorded the third highest rate of annual capital gain with dwelling values up 5.9 per cent.

In contrast, dwelling values have increased by less than four per cent in every other capital city over the year.

Index results as at February 28, 2015

Since the beginning of the growth cycle in June 2012, dwelling values have moved 22.6 per cent higher across the combined capital cities.

This again demonstrates the heat emanating from the Sydney market; values are up 34.8 per cent cumulatively over the cycle to date across Australia’s largest capital city.

cl1The latest month-on-month results show a moderation in the rate of dwelling value growth compared with the December and January movements.

The monthly rate of growth slowed from 1.3 per cent in January and 0.9 per cent in December, however the growth trend remains strong, particularly in Sydney and Melbourne.property

The slower rate of capital gain in February may come as a surprise to some who were expecting lower mortgage rates to instantly propel the pace of home value growth higher.

We are already seeing the effect of lower mortgage rates, with auction clearance rates surging to the highest levels we have seen since 2009 and valuation activity across CoreLogic RP Data valuation platforms reaching new record highs based on daily averages over the second half of February.

Despite the flurry of activity, it will likely take some time to see this flow through to a higher rate of capital gain.”

We might not see the lower interest rate environment stimulate the housing market as much as it has in the past.

Weaker jobs growth, higher unemployment, declining affordability, low rental yields and political uncertainty are all factors that could dent consumer confidence and provide some counter balance to the rate cuts and quell any additional market exuberance.

At the same time we are seeing federal regulators acting to ensure responsible lending standards are being adhered to.

APRA has been recently vocal about Australian lenders remaining within the regulatory benchmarks for the pace of investment lending and serviceability measures.

With lenders on alert to keep within the APRA benchmarks, obtaining housing finance may become more challenging for some higher risk sectors of the market which could act as another counter balance to lower mortgage rates.

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Evidence of compressed rental yields is continuing across each of the capital city markets

A year ago the gross rental yield for a capital city dwelling was averaging 4.3 per cent; by the end of February the typical gross yield has been eroded down to just 3.7 per cent – due largely to the consistent high rate of dwelling value growth relative to rental growth.for_rent_1

Over the current growth cycle to date, we have seen capital city dwelling values rising at more than three times the pace of weekly rents.

The bi-product of such strong capital gains and relatively weak rental growth is that rental yields are being forced lower and lower.

At the same time we are seeing federal regulators acting to ensure responsible lending standards are being adhered to.

APRA has been recently vocal about Australian lenders remaining within the regulatory benchmarks for the pace of investment lending and serviceability measures.

With lenders on alert to keep within the APRA benchmarks, obtaining housing finance may become more challenging for some higher risk sectors of the market which could act as another counter balance to lower mortgage rates.

Evidence of compressed rental yields is continuing across each of the capital city markets.

A year ago the gross rental yield for a capital city dwelling was averaging 4.3 per cent; by the end of February the typical gross yield has been eroded down to just 3.7 per cent – due largely to the consistent high rate of dwelling value growth relative to rental growth.

Over the current growth cycle to date, we have seen capital city dwelling values rising at more than three times the pace of weekly rents.

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The bi-product of such strong capital gains and relatively weak rental growth is that rental yields are being forced lower and lower.

Gross rental yields, houses and units Houses Units In Melbourne, the yield profile is the lowest of any capital city with the typical Melbourne dwelling showing a gross yield of just 3.3 per cent.

Sydney isn’t far behind with a gross dwelling yield of 3.6 per cent.

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If we see Sydney dwelling values continuing to outpace rents so quickly we may see Sydney take over Melbourne to show the lowest gross rental yields.

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The total return across the housing market (ie capital gain plus gross rental yield) provides some explanation about why investors are so active across the Sydney housing market.

Total returns in Sydney are approaching the 20 per cent mark over the past twelve months, substantially outperforming other asset classes.

Importantly, even though dwelling values aren’t rising as quickly in Brisbane, the total return is almost equal to Melbourne’s, at 10.9 per cent in Brisbane compared with 11.1 per cent in Melbourne, thanks to the healthier yield profile of the Brisbane market.

With housing market investment now roughly level with owner occupier demand (based on housing finance commitments), it is clear that investors, particularly in Sydney and Melbourne where investor activity is most prominent, are speculating that capital gains have further to go and are ignoring the low yield profile of these cities.

While this may be a successful strategy in  the short-term we would suggest a focus on both capital growth and rental return is a safer and more sound strategy overall.



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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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