The housing market is moving into the 2015 calendar year with some substantial momentum, with dwelling values 8.5% higher compared with a year ago across the combined capitals.
The growth comes on a backdrop of slowing conditions though, with the annual rate of capital gain peaking early in the year at 11.5% over the twelve months ending April.
While values are still rising at a healthy rate, at least at a high level and in trend terms, we anticipate that 2015 will see the housing market dynamic shift geographically.
Housing market conditions have been nation leading over the current cycle with dwelling values up by 31% over the cycle to date.
The rate of capital gain is slowing down though, after the annual rate of growth peaked in April last year at 16.7%.
By the end of 2014 we expect the annual rate of growth will have slowed to approximately 12.5%.
We expect the trend towards a more sustainable rate of capital gain to continue over the 2015 due to natural affordability constraints that are becoming increasingly evident in the market, as well as a reduction in investor demand which will likely be attributable to the low yield environment as well as tougher investment lending requirements from the banking sector.
The Melbourne housing market has played second fiddle to Sydney’s rate of capital gain over the current growth cycle, with values moving a cumulative 17.6% higher by the end of November this year.
The rate of annual growth across the Melbourne housing market has been slowing since January when dwelling values had moved 11.9% higher over the 12 month period.
By the end of 2014 we expect the annual rate of capital gain to have drifted back to approximately 8%.
This slowing trend is likely to continue through 2014 as investor demand is dampened by the low rental yield scenario as well as tighter finance controls around investment lending from the banking sector.
New housing supply across the inner city area of Melbourne and the outer fringes has been sufficient when compared with population growth, which is also likely to soften the level of capital gains over the coming year.
Brisbane (along with Adelaide and Hobart) is one of only three capital cities where the annual rate of capital gain is likely to be higher this year than it was last year.
We are expecting the annual rate of capital gain to finish the year around the 7% mark, compared with a 5.1% capital gain over the 2013 calendar year.
With the rate of capital gain holding relatively firm over the second half of 2014, fewer affordability pressures and better rental yields than Sydney or Melbourne, we are expecting growth in Brisbane dwelling values to outperform the capital city average over the coming year.
Despite the uncertainty in the local economy, the Adelaide housing market is likely to finish the 2014 calendar year with a higher rate of capital gain compared with the 2013 calendar year.
We are expecting Adelaide values will have increased by approximately 3.5% in 2014 compared with a growth rate of 2.8% over 2013.
Transaction numbers have been rising over the second half of the year indicating a rise in buyer demand, affordability pressures are relatively tame and rental yields are higher than what can typically be found in Sydney and Melbourne.
While we aren’t expecting values to surge across Adelaide in 2015, a steady market with values continuing to show a modest rise is the likely outcome.
The Perth housing market moved through the peak of its growth cycle in December 2013 when then annual rate of growth was recorded at 9.9%.
Since then the annual rate of growth has drifted substantially lower and we expect by the end of 2014 the annual rate of growth will be closer 1%.
Population growth into Western Australia has slowed sharply which is reducing demand for housing at a time when there is a large amount of new detached housing approved for construction.
Additionally, the previously strong Western Australian economy is progressively weakening as the pipeline of large infrastructure projects winds down.
Dwelling values are likely to continue their weak trend and may potentially end the next calendar year lower.
The Hobart housing market has been the weakest of any capital city post GFC.
In fact, Hobart dwelling values remain 3.9% lower than what they were at the beginning of 2009.
More recently, housing market conditions have started to improve across Hobart.
Transaction numbers have recorded a sharp rise from a low base and dwellings show a remarkable level of affordability compared to other capital cities and gross rental yields are the second highest of any capital city after Darwin.
Dwelling values are likely to finish the 2014 calendar year about 6% higher, and as demand from lifestyle buyers continues to rise, we expect Hobart home values to continue their moderate trend higher during 2015.
The Darwin housing market has been a solid long term performer, recording the highest rate of capital gain over the past decade across the capital cities.
Dwelling values have increased by 17.5% over the length of the current growth cycle, however growth in dwelling values has been trending lower over the second half of 2014.
The 2014 calendar year is likely to see Darwin dwelling values increase by approximately 1.5%.
Prospects for further growth over 2015 are diminishing due to a wind down in the major infrastructure projects that are currently underway in Darwin.
The Darwin housing market is still providing the highest gross rental yields of any capital city market, however it is likely investor demand will taper in line with capital growth.
The National Capitals’ housing market saw a material slowdown over the second half of 2014 with dwelling values likely to finish the second half the calendar year approximately 1% lower.
Uncertainty surrounding the local labour market, federal government job cuts and potentially an oversupply of housing are all factors that are likely to contribute flat to falling housing values during 2015.
We are expecting ‘lifestyle’ markets to continue their bounce back in buyer demand and values.
At the same time, the downturn in commodity prices and mining related infrastructure spending is likely to continue to dampen housing markets across resource intensive regions.
What About Interest Rates?
Central to housing market performance will be the direction of interest rates.
There is growing debate that the next rates movement may be down rather than up.
A further reduction in the cash rate will bring mortgage rates even lower than their current record low settings.
Theoretically, lower rates should provide a boost to housing market conditions, however, if this stimulus does transpire, it is likely to be balanced by pervasively low consumer confidence and softer labour markets which show unemployment is already at its highest level in a decade and forecast by Treasury to move higher over the coming months.
Additionally, the impact of the recent APRA announcement around investment lending may act to restrict the availability of finance to investors.
The banking sector will be under scrutiny to keep growth in investor loans at slower than 10% pace of growth which is likely to have some downwards pressure on investor related housing demand.
Overall we are expecting another solid year of housing market conditions and further capital gains, albeit at a more sustainable rate that what we have seen over 2014.
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