Value growth lags rental growth

Rental growth has outstripped growth in home values ever since the on-set of the financial crisis however, with mortgage rates now at near record lows upgraders and investors are the main beneficiaries not first time buyers.

Since the onset of the financial crisis in 2008, the Australian housing market has experienced lower levels of capital gains. This has occurred on the back of declining credit growth, falling sales volumes and increased levels of savings by households.

Although value growth has slowed, rental growth has generally been quite robust and has outstripped growth in home values across each capital city housing market.

Although you might think first home buyers would be capitalising on these conditions, investors and upgraders are really the key beneficiaries.

Across the combined capital city housing markets, home values have increased by a total of 13.4% since the end of 2007 compared to a 32.1% increase in rental rates.

Rental rates have increased at more than double the rate of home values over this period. In five and a half years, growth in capital city home values has not increased at a rate higher than inflation.

 

RP Data Property Pulse - research article

 

In Sydney, home values have increased by a total of 20.4% since the end of 2007 compared to a 34.7% increase in unit rents. As you can see from the second chart, rental growth has consistently outperformed value growth over this period.

 

RP Data Property Pulse - research article

 

Since the end of 2007, rental rates in Melbourne have increased by a total of 24.4% compared to value growth of 20.3%. As the data shows, the gap between rental and value growth over the period is quite narrow in Melbourne.

Between September 2009 and December 2011 growth in values was outpacing rental growth. The more recent falls in home values has seen the moderate and consistent rental growth outpace value growth.

 

RP Data Property Pulse - research article

 

Brisbane home values have actually fallen by a total of 3.3% since the end of 2007. In comparison, rental rates have increased by 26.9% clearly outperforming the change in home values over this period.

With rental growth significantly outpacing value growth since the end of 2007 it is no surprise why sales activity is now growing across the city with housing affordability being improved over this period of home value falls.

 

RP Data Property Pulse - research article

 

Adelaide rental rates have increased by a total of 21.0% since the end of 2007 compared to total home value growth of just 7.3% over the same period.

With rental growth outstripping value growth over the period, the relative cost of buying has improved as mortgage rates have fallen and rental costs have increased at a faster pace.

 

RP Data Property Pulse - research article

 

Perth rents have experienced very strong growth over the past few years while in comparison value growth hasn’t really picked-up until the past 12 months.

As a result, home values have increased by a total of just 2.1% since the end of 2007 compared to rental growth of 47.6% over the same period. The 45.5% gap between rental growth and value growth is the largest of all capital cities.

 

RP Data Property Pulse - research article

 

Across Hobart, Darwin and Canberra the same trends have been recognised with value growth being outstripped by rental growth since the on-set of the financial crisis.

With mortgage rates having fallen significantly to almost record low levels, it is no wonder transaction activity is now picking up however, it hasn’t been the first time buyers as you might expect.

In a typical market you’d expect the escalating rent and limited value growth would see increased first time buyer activity however, this has not been the case to date.

The reasons are likely due to a shift in first home buyer incentives to specifically target the more expensive new product as opposed to generally more affordable existing product in a number of states.

Secondly, significant demand by first time buyers was bought forward to 2009 due to low mortgage rates and large incentives at that time.

In the current market it is investors taking advantage of the recent limited value growth and strong rental growth seeking a decent investment return mainly driving the market.

Secondary to that, upgrader activity is also quite strong. These upgraders are taking advantage of the low mortgage rates and limited value growth to upgrade from their current home into a superior one as mortgage costs have tumbled.

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Property & Econonomic Update

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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


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