The May RP Data – Rismark home value index results out today confirmed a fall in capital city dwelling values by 1.9% over the month which can likely be attributed to both seasonality and more moderate housing market conditions.
For the first time in 12 months, dwelling values across Australia’s capital cities showed a monthly fall by dropping 1.9 per cent in May. Across most of the individual capital cities, dwelling values were also down over the month, led by Melbourne with a -3.6 per cent reduction in values.
Over the past three months capital city dwelling values are up 0.7 per cent, the lowest rolling quarterly rate of dwelling value appreciation since the three months ending June 2013.
Over the growth cycle to date, which commenced in June 2012, capital city dwelling values are up 13.9 per cent. The surge in values has largely been driven by strong market conditions in Sydney (+21.1 per cent).
The month-on-month fall in capital city dwelling values is likely due in part to seasonal phenomenon, but may also be indicative of a broader trend towards cooler housing market conditions.
Historically, housing market conditions have softened in April and May as the market rebalances from what is typically a seasonally strong first quarter and also as a results of cooler climatic conditions during the autumn and winter months. Outside of the seasonality, we have been seeing signs that the housing market is at or approaching the peak of the growth cycle.
The rolling quarterly rate of growth peaked in August last year and we have been seeing weaker auction clearance rates since late February when the capital city clearance rate hit 76 per cent.
By way of its cycle, Australia’s housing market has shown that a growth phase usually lasts around two years. With affordability becoming more challenging and rental yields substantially compressed across Australia’s two largest cities, we wouldn’t be surprised if the growth trend moderated further over the year.
A recent deterioration in consumer confidence reported in the Westpac/Melbourne Institute Consumer Sentiment Index shows that this factor may also be playing a role in the winding down of housing market conditions.
According to the Index, consumer sentiment recently peaked in September last year and has since declined by 16.0 per cent. The May consumer sentiment results showed a significant fall away which can be attributed to the announcements made in the recent Federal Government Budget announcement.
There is a very strong correlation between levels of consumer confidence and housing market activity. If we see sentiment levels remaining low it is likely that housing market activity will be more sedate.
Across the broader price segments of the capital city housing markets, the premium markets have attracted the highest capital gain over the past twelve months with values across the most expensive quarter up 10.9 per cent compared with a 10.8 per cent lift in values across the broad middle fifty per cent of the market, and a 9.1 per cent gain at the most affordable quarter of the market.
It was interesting to see that over the past three months to the end of May, it has been the most expensive properties where values have shown a fall.
The most expensive quarter of capital city dwellings have seen their values fall by 0.5 per cent while the most affordable end of the market has seen a 2.8 per cent rise in dwelling values over the same period.[sam id=43 codes=’true’]
This shift in the performance across price segments, where more affordable housing has shown a stronger capital gain, was apparent last month also.
For affordability reasons, it’s common to see buyers move their focus to lower-valued segments of the market following solid capital growth in the premium priced housing segment.
Sydney’s housing market has led the way for capital gains with local values moving 21.1 per cent higher since the market reached a recent low point in May 2012. Over the same period rental rates have only increased by 6.3 per cent.
A similar trend can be seen in the Melbourne market where values are 12.3 per cent higher over the current growth cycle but rents have only shifted by 4.3 per cent. The net result is a substantial compression in rental yields across both of these cities.
The gross yield on the typical Melbourne house is now just 3.4 per cent while in Sydney it is slightly higher at 3.8 per cent. Such a low gross yield environment would suggest that investors are focussed on prospects for capital growth rather than rental income.
Investors should be wary of such low yields, as the figures indicate dwelling values are too high relative to rents.
If value growth continues to moderate in these low yielding markets, recent investors will be left holding a low yielding asset without a great deal of capital growth upside over the coming years.
Current investor risk is very much concentrated within the Sydney and Melbourne markets where investor activity has been the most concentrated.