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Australian Residential Property Market & Economic Update Feb 2018: Part 1

What’s the state of play for the Australian housing markets?

That’s exactly what we’ll cover today and in the next 3 days as we unpack Corelogic’s latest.

IntroductionAustralian Residential Property Market & Economic Update Feb 2018 Part 1 и 1

While dwelling values increased in 2017, there was a notable slowing of the market late in the year, culminating in national values falling by -0.3% over the final quarter of the year.

This represented the largest (and first) quarterly fall in dwelling values since the three months to April 2016.

Throughout 2017, national dwelling values increased by 4.2% which was down from 5.8% at the end of 2016 and the slowest rate of annual growth since October 2016.

Importantly there was a noticeable slowing through the year once annual growth peaked at 10.4% in May 2017.

Sydney, which accounts for almost one third of the total value of housing nationally, is leading the slowdown with values falling by -2.1% over the final quarter of 2017.Sydney

Most other capital cities have also experienced a slowing of the rate of value change over recent quarters.

In fact, only Perth and Darwin, where home values have been in decline since 2014, have recorded an improvement in housing performance over the final quarter of the year compared to the third quarter.

Outside of Sydney, dwelling values have increased over the quarter in Melbourne (0.9%), Brisbane (0.3%), Adelaide (0.3%), Perth (0.1%), Hobart (3.1%) and Canberra (1.0%) and have fallen in Darwin (-2.9%).

Over the 2017 calendar year, values have fallen in Perth (-2.3%) and Darwin (-6.5%) and have increased in Sydney (3.1%), Melbourne (8.9%), Brisbane (2.4%), Adelaide (3.0%), Hobart (12.3%) and Canberra (4.9%).

The recent slowing of value growth nationally comes after a strong phase of growth which has been led by Sydney and Melbourne.

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The surge in dwelling values has occurred against a back-drop of low inflation, low mortgage rates and historically weak income growth.

As a result, housing affordability has deteriorated substantially in Sydney and, to a lesser extent, in Melbourne.

The past few years have also been characterised by high rates of population growth nationally and a heightened level of new housing construction activity, particularly for units.

The construction boom has facilitated an increase in dwelling accommodation however, it has also occurred at the same time as historic high levels of investment activity in the housing market, with investment largely focused within Sydney and Melbourne.

Residential developers have ramped up the construction of new dwellings, supported by strong demand for their stock, with much of this demand coming from investors that have been attracted by the strong capital gains on offer in Sydney and Melbourne as well as tax deductibility of investment costs.

Over the period Australia has also seen a sharp rise in the level of foreign investment in housing stock. 

More recently investment has slowed due to a combination of credit rationing and higher mortgage rates for investors as well as those not paying down the principal on their mortgage.Melbourne

This has also occurred in line with a a slight pull-back in new housing construction however, approvals are now climbing again.

Although both investment and construction activity has slowed both remain substantially higher than long-term average levels.

CoreLogic previously had concerns that heightened levels of new housing construction and investor participation would cause rents to fall and a year ago rental growth was slowing across most regions of the country.

Over the past year though, there has been an acceleration in rental growth with the rents increasing by 2.7% over the year.

A similar trend has been evident across all capital cities however, the rate of growth now appears to be slowing.

Exactly what has driven this acceleration is unclear however, it is probably due to a number of factors including: rapid population growth and the sheer lack of affordability of owning a home.

Furthermore, the rising popularity of AirBnB is potentially resulting in some level of stock removal from the long-term rental market and increasing supply in the short-term market.

Additionally, as mortgage rates edge higher, particularly for investment mortgages, it is likely that landlords will be doing their best to recoup their higher cost of debt by pushing rents higher if Building Constructionpossible.

Capital city dwelling values have now been rising for more than five and a half years and the rate of growth in Sydney and Melbourne has been significantly greater than that outside of these two cities.

While lower mortgage rates have improved mortgage serviceability, for those that don’t own a home it is increasingly difficult for them to firstly save a large enough deposit and secondly to compete with the equity that current home owners have built over recent years.

More recently the housing market has slowed due to a range of factors including tighter credit policies, stretched affordability, supply additions and higher mortgage rates for investors.

As a result the market is expected to continue to transition in 2018 with falls potentially set to continue in Sydney while conditions across Melbourne’s housing market are also expected to slow further.

Housing Market

Over the three months to December 2017, national dwelling values fell by 0.3%; the first rolling quarterly fall since April 2016.

National dwelling values fell by -0.3% over the final quarter of 2017 which was the first quarterly decline since the three months to April 2016. House Market Valuse End Of 2017

Over the quarter, combined capital city dwelling values fell -0.5% while combined regional areas saw values increase 0.5%.

The quarterly decline in capital city dwelling values was driven by a -2.1% fall in Sydney with Darwin (- 2.9%) the only other capital city in which values fell over the quarter.

Over the past 12 months, national dwelling values increased by 4.2% with combined capital city values 4.3% higher and combined regional market values up 3.8%.

Looking at the annual change in house and unit values; houses increased by 4.0% nationally, 4.0% across the combined capital cities and 3.9% across the combined regional markets compared to 4.9%, 5.1% and 3.6% respectively for units.

A1

Source: Corelogic

Hobart was the only capital city to record double-digit value growth in 2017

National dwelling values recorded a slowdown in growth throughout 2017 with the 4.2% annual change the slowest over a calendar year since they rose 1.1% in the 2012 calendar year.

Although nationally value growth in 2017 was lower than the 5.8% in 2016, amongst the capital cities only Sydney, Adelaide and Canberra recorded a weaker annual change in 2017 than in 2016.

Throughout 2017, the annual change in dwelling values peaked in May 2017 at 10.4% and decelerated each month thereafter to be less than half that rate by the end of the year. Hobart

Annual value growth was strongest over the year in Hobart (+12.3%) with Melbourne (+8.9%) the only other capital city to record an annual change in excess of 5%. Most capital cities other than Hobart and Melbourne recorded annual growth of less than 5% while Perth (-2.3%) and Darwin (-6.5%) have continued to see values fall on an annual basis.

Sydney house values have increased by 2.1% over the past year compared to a 5.4% increase in unit values however, over the December quarter house values were -2.9% lower while unit values fell by – 0.4%.

Over the past year, Melbourne house values have increased by 9.1% compared to a 8.4% increase in unit values and over the quarter house value growth (+0.6%) was lower than unit growth (+1.8%).

A2

Source: Corelogic

House values in Brisbane increased by 3.1% over the 12 months to December 2017 while unit values fell by -1.2%, over the quarter the value of houses increased 0.5% while unit values fell by -0.6%.

Over the 12 months to December 2017, Adelaide house values increased by 3.3% compared to a 0.5% increase in unit values while over the quarter house values rose 0.5% and unit values increased by 0.3%.

Perth house values fell by -2.6% and unit values were -0.9% lower over the 12 months to December 2017 while over the quarter house values increased by 0.1% while unit values increased 0.4%.

Values of houses in Hobart have increased by 12.9% and units by 9.1% over the past year while over the past quarter, house values were 3.0% higher and unit values rose by 3.4%.

Throughout the 12 months to December 2017, Darwin house values fell by -5.3% compared to a – 8.4% fall in unit values while over the past quarter, house values were -2.4% lower and unit values were -4.0% lower.

Over the past 12 months, Canberra house values have increased by 5.8% while unit values have increased by 2.1% and over the past quarter, houses increased by 1.5% and units fell by -0.6%.

The housing asset class generated total returns of 8.1% over the past year

Over the 12 months to December 2017, total property returns which factor in both capital growth and rental returns have been recorded at 8.1% split between 7.8% across the combined capital cities and 9.2% across the combined regional markets. Darwin

Nationally, total returns over 2017 were lower than the 10.1% a year ago and well down from the peak throughout 2017 of 14.7% in May.

Investors enjoyed double-digit returns from residential property over the past year in Melbourne and Hobart.

All other capital cities except for Darwin recorded positive total returns over the year however, they were relatively moderate.

Over the past five years, total returns nationally have been recorded at 11.2% p.a. while Sydney (14.7% p.a.) and Melbourne (13.1% p.a.) have generated much higher returns, returns in Perth (3.5% p.a.) and Darwin (1.5% p.a.) have been much lower.

A3

Source: Corelogic

Growth in Sydney and Melbourne over recent years has eclipsed all other capital cities

Following a decline of -6.5% between June 2010 and February 2012, national dwelling values have increased by 40.7% since that time to December 2017. Sydney-melb

The chart below shows the increase in home values across the current phase in each capital city with Sydney and Melbourne recording a substantially higher level of growth than all other capital cities.

Considering that Hobart has recorded the third highest rate of growth at just 30.8%, with most of that growth over the past two years, it is clear that this growth phase has been very much focused on Sydney and Melbourne.

Outside of the two major capital cities and Hobart, values have increased by 20.7% in Brisbane, 16.6% in Adelaide and 15.8% in Canberra.

Over the period, Perth has recorded a value increase of just 0.9% while Darwin values are – 10.2% lower.

Interest rates are usually named as the catalyst for such strong growth, but all cities have the same interest rates, yet Sydney and Melbourne have substantially outperformed all other capital cities. As we further dissect the housing market it is clear that demographics, investment concentrations and labour markets are a big driver of Sydney and Melbourne’s strength.

A4

Source: Corelogic

Since value falls in 2008 housing market growth conditions have been significantly skewed towards Sydney and Melbourne

In 2008, during the financial crisis, capital city dwelling values fell by -7.9% between March 2008 and January 2009 but with lower interest rates and first home buyer stimulus dwelling values began to rise thereafter. Sydneys Harbour Views

As has been the case with the most recent growth phase, since the global financial shock it has been the two largest capital cities that have seen substantial value growth while other capital cities have recorded relatively moderate increases in values.

The relative strength of the Sydney and Melbourne economies, strong migration into those cities and a relatively low supply of stock available for sale has supported this growth in dwelling values while these conditions have generally not been apparent in other capital cities.

Since December 2008, Sydney and Melbourne dwelling values have almost doubled.

All other capital cities except for Adelaide (21.4%), Hobart (35.0%) and Canberra (31.4%) have recorded cumulative value growth of less than 20% since the end of 2008 with Darwin values lower now than they were then.

A5

Source: Corelogic

Houses continue to show a premium over units across the country

At the end of December 2017, the national median value of a house was recorded at $562,294 and the median unit value was $516,551, a gap of 8.9%.

When you split the results individually to the combined capital cities and combined regional markets the gap between house and unit values is wider in the capital cities (19.5%) and narrower in the regional markets (7.2%).

Across the individual capital cities, the premium for houses over units is recorded at: 37% in Sydney, 45% in Melbourne, 38% in Brisbane, 38% in Adelaide, 19% in Perth, 27% in Hobart, 31% in Darwin and 55% in Canberra.

In dollar terms the gaps between house and unit prices are recorded at: $284,182 in Sydney, $258,683 in Melbourne, $147,496 in Brisbane, $127,481 in Adelaide, $76,075 in Perth, $88,962 in Hobart, $112,091 in Darwin and $238,593 in Canberra.

A6

Source: Corelogic

Settled sales transactions have continued to trend lower

It is estimated that over the 12 months to December 2017 there were 471,917 settled dwelling sales nationwide.

Compared to sales over the 12 months to December 2016, the number of transactions was – 4.8% lower. Annual sales are tracking 13.2% lower than the recent peak recorded over the twelve months ending August 2015. Adelaide

The combined capital cities recorded an estimated 296,916 settled sales over the year which accounted for 63% of total sales nationally.

Capital city transactions were -6.4% lower over the past year than the previous year while regional market transactions were down -2.0%.

Across the individual capital cities, the annual change in transactions was recorded at: -5.6% in Sydney, -11.2% in Melbourne, -8.2% in Brisbane, – 0.1% in Adelaide, +1.5% in Perth, +3.2% in Hobart, +2.5% in Darwin and -6.3% in Canberra.

Note that these figures only count settled sales; offthe-plan sales will typically settle upon completion of the project, at that time these sales will be counted at their contract date.

Given this, it is expected that recent years of sales activity will be revised higher once these settlements occur.

A7

Source: Corelogic

Discounting levels have been trending lower over recent years

Vendor discounting measures the difference between the initial list price and the ultimate selling price of properties which sell by private treaty for less than their original list price.

Vendors that sold their homes below the initial list price are currently discounting them by 5.6%.

The current level of discounting across the individual capital cities is recorded at: 5.2% in Sydney, 4.3% in Melbourne, 5.64% in Brisbane, 5.7% in Adelaide, 7.9% in Perth, 5.6% in Hobart, 11.4% in Darwin and 3.3% in Canberra.

Sydney and Darwin are the only capital cities in which discounting levels are higher over the year, up 0.1% and 2.9% respectively.

With advertised stock levels rising in Sydney, its likely discounting rates will see some upwards pressure though 2018.

A8jpg

Source: Corelogic

The length of time it takes to sell a home is slightly higher over the past year

The days on market figure measures the average time from the first listing date to the contract date for properties sold by private treaty. sale-sign-auction-house-property-market

Combined capital city homes are currently taking an average of 39 days to sell compared to 36 days at the same time a year ago.

At an individual capital city level, the average days on market is recorded at 36 days in Sydney, 31 days in Melbourne, 55 days in Brisbane, 47 days in Adelaide, 58 days in Perth, 29 days in Hobart, 90 days in Darwin and 35 days in Canberra.

The typical days on market has reduced over the past year in Adelaide (-3 days), Perth (-1 day), Hobart (-3 days), Darwin (-9 days) and Canberra (- 1 day).

In Sydney, Melbourne and Brisbane homes are taking longer to sell than they were a year ago, up 6 days, 2 days and 10 days respectively.

A9jpg

Source: Corelogic

Rental growth has accelerated over the past year despite high levels of housing stock additions.

Rental rates increased by 2.7% nationally over the 12 months to December 2017 with combined capital city rents 2.6% higher and combined regional market rents up 3.0%.

Nationally, unit rents (+2.9%) have increased at a faster pace than house rents (2.6%) and this is reflected across the combined capital cities (2.9% vs. 2.4%) however, in the combined regional markets house rents (3.1%) have outperformed unit rents (2.5%).

Although annual rental growth is higher now than it was a year ago, over recent months the rate of rental increase has slowed.

It will be interesting to see whether supply additions over the coming months and years result in a further softening of rental growth.

At an individual capital city level, the annual change in dwelling rents have been recorded at: +3.0% in Sydney, +4.3% in Melbourne, +0.2% in Brisbane, +3.1% in Adelaide, -2.5% in Perth, +9.4% in Hobart. -1.5% in Darwin and +4.9% in Canberra.

A10jpg

Source: Corelogic

Gross rental yields have begun to firm due to rents increasing faster than dwelling values key house

At the end of December 2017, the gross rental yield nationally was recorded at 3.6%, 3.3% across the combined capital cities and 4.9% across the combined regional markets.

Houses (3.5%) have lower gross yields than units (4.1%) nationally as well as across the combined capital cities (3.1% vs. 3.9%) and combined capital cities (4.9% vs. 5.2%).

Across Australia, gross rental yields have softened, with this easing trend evident across both the combined capital city and combined regional markets over the past year for houses and units.

Throughout the individual capital cities, gross rental yields are currently recorded at: 3.1% in Sydney, 2.9% in Melbourne, 4.3% in Brisbane, 4.2% in Adelaide, 3.9% in Perth, 5.0% in Hobart, 5.9% in Darwin and 4.4% in Canberra.

 

A11

Source: Corelogic

Gross rental yields are currently lower than they were a year ago across most capital cities, the exceptions are Sydney and Darwin.

With rental growth remaining firm in most areas and value growth slowing we expect to see some further increases in yields over the coming year.

Watch out tomorrow and in the subsequent days for the balance of this comprehensive report.

You may also be interested in reading:

AUSTRALIAN RESIDENTIAL PROPERTY MARKET & ECONOMIC UPDATE FEB 2018: PART 2

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About

Tim heads up the Core Logic RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia. Visit www.corelogic.com.au


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