Sydney dwelling values surged 3% higher in March while the remaining capital cities showed a relatively flat month for capital gains.
Home values across the combined capital cities increased by 1.4 per cent in March 2015 according to the CoreLogic RP Data Home Value Index, driven by an exceptionally strong Sydney result where dwelling values were 3.0 per cent higher over the month.
The latest indices reading shows capital city dwelling values moved 3.0 per cent higher over the first quarter of the year.
Although value growth has started 2015 on a strong note, the annual rate of growth has moderated back to 7.4 per cent, which is the slowest annual growth rate since September 2013.
Sydney remains the standout capital growth performer, with values rising by 3.0 per cent over the month, 5.8 per cent over the quarter and 13.9 per cent over the year.
With stronger housing market conditions over the first three months of the year, annual home value growth across the Sydney market has rebounded after slowing to 12.4 per cent in December 2014.
The Sydney property market is the only housing market where dwelling value growth remains in double digits, with the next strongest performer was the Melbourne Property Market, showing a much lower rate of annual capital gain at just 5.6 per cent.
Each of the remaining capital cities have recorded an annual rate of growth which is less than three per cent, with values having declined across Perth, Darwin and Hobart over the year.
Since home values began their current growth phase in June 2012, dwelling values across the combined capital cities have increased by 24.3 per cent.
Most of this growth is emanating from Sydney.
Over the current growth phase, Sydney dwelling values have increased by 38.8 per cent with Melbourne second strongest at 23.6 per cent.
On the other hand, total dwelling value growth over the current cycle has been less than 10 per cent in Adelaide, Hobart and Canberra.
Combined capital city home values have increased by 3.0 per cent over the first quarter of 2015
While that rate of growth is strong it is important to note that it is lower than the 3.5 per cent increase in home values over the first quarter of 2014.
Based on the March results, Sydney’s growth trend appears to have disengaged from the rest of the capital city housing markets in terms of demand and subsequently in terms of value growth.
The 5.8 per cent growth in Sydney Property Market dwelling values over the first quarter is the strongest quarterly growth rate since home values increased by 6.2 per cent over the three months to April 2009.
The strength of the Sydney housing market currently is further highlighted by the fact that since the Reserve Bank cut official interest rates to 2.25 per cent at the beginning of February, auction clearance rates have been above 80 per cent each week.
While dwelling values continue to rise across most cities, weekly rents are failing to keep pace.
Across the combined capital cities dwelling rents have risen by just 1.7 per cent over the past year which is a stark contrast to the 7.4 per cent capital gain in dwelling values over the same period.
Sydney is showing the highest increase in weekly rents over the year at 3.3 per cent, while Perth has shown the most substantial correction, with weekly rents down 4.1 per cent over the past twelve months.
The fact that dwelling values are moving higher at a much faster pace than rents is causing gross rental yields to consistently compress across each of the capital cities.
Since mid-2013, the average gross rental yield across Australia’s combined capital cities has reduced from 4.3 per cent down to 3.6 per cent.
Gross rental yields are now approaching record lows in both Melbourne and Sydney at 3.3 per cent and 3.6 per cent respectively.
The latest housing market data is likely to present a further challenge for the Reserve Bank when they deliberate interest rate settings next week.
Gross rental yields, houses and units
Despite the headwinds of softer labour markets, very low rental yields, increased oversight on lending conditions and heightened economic uncertainty, historically low mortgage rates appear to be adding further stimulus to the housing market, albeit that stimulus is largely being felt in Sydney.
Since the previous rate cut we have seen auction clearance rates surge higher and activity across CoreLogic mortgage platforms has moved to new record levels.
Clearly the vast majority of growth in dwelling values can be attributed to a very strong Sydney market that is largely fuelled by investment demand.
The interest from investors is understandable, with housing currently offering up strong capital gains.
With the growth curve in Sydney now well advanced and rental yields approaching historically low levels, prospective investors may be wise to use some caution when considering their investment options.”
Although household income growth is minimal, Sydney’s housing market continues to reach new record highs, with values increasing over the past 35 months.
It does pose the question of how much longer the growth can persist.
When the Sydney housing market starts to lose momentum, there is some risk that recent investors could be left holding a very expensive but low yielding asset with a lower than expected rate of capital gain over the coming years.
From there it will be interesting to see if they bide their time in the housing market or exit to other asset classes with a stronger return profile.