What could stop this property cycle? | Cameron Kusher

The RP Data CoreLogic Home Value Index results for August 2014 show that home values rose by 4.2% over the three months to August 2014 and are now 10.9% higher over the past year.

The growth in the market over the past year has largely come from Sydney (16.2%) and Melbourne (11.7%), with Adelaide (5.9%) the next strongest performer.

Since the current value growth phase commenced in June 2012, following 19 months of value falls, combined capital city home values have increased by 18.7%.

Although values have increased across each capital city, Sydney (27.2%), Melbourne (19.5%) and Darwin (20.0%) have been the stand-out cities for value growth. In fact, Perth (15.0%) is the only other city to have recorded double-digit value growth over the period.

Taking a longer-term view you can see that the strength in the housing market has really been all about Sydney and Melbourne.

From the market peak in March 2008 to its low point in December 2008, combined capital city home values fell by -6.1%.

From that point, values once again began to increase. Looking at total home value growth from December 2008 to August 2014, only Sydney and Melbourne really stand-out.

Between December 2008 and August 2014, Sydney home values are up 50.1% and Melbourne home values are 47.5% higher.

The next best performed markets are Darwin (29.0%), Canberra (21.5%) and Perth (15.0%). Home values are -1.4% lower in Hobart while growth in Brisbane (5.3%) and Adelaide (9.9%) has been less than 10%.

Although the headline figure represents quite a high level of recent value growth, the increase in values is largely due to growth in home values in Sydney and Melbourne.

Of course, these two cities are the largest and therefore have a bigger influence on the combined capital cities index. In light of the recent value growth it is important to realise that it is really a Sydney and Melbourne story with value growth only moderate elsewhere.

The next question is why are Sydney and Melbourne attracting so much growth? This is due to a number of factors which are seemingly propelling these markets:

  1. Mortgage rates are extremely low (note that this isn’t just the case for Sydney and Melbourne)
  2. For 8 of the past 10 years both Sydney and Melbourne have recorded the greatest increase in in population of all cities.
    In fact, for each of the past 13 years Melbourne has recorded the greatest population increase of all capital cities.
  3. The outflow of residents from Sydney and Melbourne to other states, particularly Queensland and Western Australia, has slowed dramatically since the financial crisis.
  4. The comparatively stronger value growth between 2009 and 2012 in Sydney and Melbourne means home owners have the equity to purchase investment properties or to upgrade from their current home.
    The sluggish recent value growth in other cities does not afford home owners the same level of equity and therefore less of an opportunity to upgrade or purchase investment properties.
  5. Investment activity has been very much focussed on Sydney and Melbourne as values have grown, which has encouraged further growth.
    Investors are seemingly targeting capital growth rather than rental returns with Sydney and Melbourne having the lowest rental returns of any Australian capital cities. Of course, this growth won’t continue forever.
  6. The New South Wales and Victorian state governments have changed the availability of first home buyer grants to apply to new rather than existing properties.
    This has discouraged first home buyers from entering the market, creating more opportunities for upgraders and investors.

Given these factors are driving demand and subsequent growth in home values, if these factors were to change, we may see a slowdown in value growth across these cities.

Interest rates are the most obvious trigger that could slow down the exuberance in the Sydney and Melbourne housing markets however, the Reserve Bank continues to indicate a period of interest rate stability.

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With interest rates already at historic low levels and returns on safe investment classes so low, the maintenance of current interest rate settings is likely to continue to encourage investment in housing.

In New Zealand and the UK the regulators have introduced macro prudential tools which provide limitations to lending.

In New Zealand, the regulators have introduced a limit of just 10% of all lending which can go to mortgages with a loan to value ratio (LVR) of more than 80%.

The latest data from the June quarter showed that 33.8% of lending over the quarter had an LVR of more than 80%.

In the UK, the regulators have introduced limits on higher risk mortgage lending by limiting to 15% of all new mortgage lending for mortgages of 4.5 times or more the annual income of the mortgagee.

With current median dwelling prices of $650,000 and $523,750 in Sydney and Melbourne respectively, it seems fairly safe to assume more than 15% of mortgagees are borrowing more than 4.5 times their annual income to purchase in those cities.

To date both the RBA and APRA have shown a reluctance to introduce macro prudential tools preferring instead to utilise a behind closed doors approach to ensuring lending standards are maintained.

Of course, other sectors of the economy need lower interest rates so they have continually flagged a period of rates stability.

With home values in Sydney and Melbourne continuing to march higher it seems as if only higher interest rates or the introduction of macro prudential tools can realistically stop the growth in home values.



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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


'What could stop this property cycle? | Cameron Kusher' have 2 comments

  1. September 12, 2014 @ 10:45 am Geoff Curtis

    Do you think it is likely that the higher growth rates will flow through to the other markets ? Particularly Brisbane?

    Reply


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