CoreLogic Property Pulse, Australasia research undertook an analysis of capital city home values activity since the onset of the 2008 financial crisis.
As you’d expect, Sydney and Melbourne led the charge in values growth, while other capitals recorded a relatively mute outcome.
The 2007/08 financial crisis hit Australia’s housing market hard and delivered a -6.1% decline in home values between March and December 2008.
Fortunately, aggressive interest rate cuts by the Reserve Bank (RBA) and the introduction of the boost to the First Home Owners Grant, averted further home value declines.
In fact, home values began to rise across two cycles; from December 2008 and in June 2016, 7.5 years later, combined capital city home values are now 54.9% higher.
As shown in the first chart (adjacent), the increases in home values are highlighted over the past 7.5 years.
What is noticeable is that the increases have been all about Sydney (87.9%) and Melbourne (71.8%). In fact, most other capital cities have recorded growth which is around or below the rate of inflation.
From December 2008, combined capital city home values increased until October 2010, rising by an impressive 21.8%.
Official interest rates were first increased coming out of the financial crisis in October 2009, rising by 175 basis points to November 2010.
The boost to the First Home Buyers Grant was partially removed in September 2009 and completely removed after December 31 2010.
Combined, these factors saw the rate of value growth slow, followed by a decline in dwelling values.
As can be seen in chart number two (adjacent) it highlights that from December 2008 to October 2010, dwelling values rose in all cities with Sydney, Melbourne and Darwin the standouts. Mr Lawless said, “Despite very low interest rates, Brisbane, Adelaide, Perth and Hobart recorded little value growth over this period.
Key Points of interest:
• Between October 2010 and May 2012 as stimulus was removed from the housing market, combined capital city home values fell by -7.4%.
• Darwin, Melbourne and Brisbane recorded the largest falls over the period.
• In October 2010, official interest rates were recorded at 4.75% and by May 2012 they had fallen by 100 basis points to 3.75%.
• From May 2012 to June 2016, combined capital city home values have increased by 37.3% while official interest rates fell by 200 basis points to 1.75%.
Although home values have increased over the period, Sydney and Melbourne have recorded a substantially higher rate of value growth than all other capital cities.
The data indicates that since the financial crisis the capital city housing market could best be described as being ‘extremely interest rate sensitive.
A deeper dive into the data shows that in reality, only Sydney and Melbourne have responded to the stimulus of low interest rates.
The relative strength of the Sydney and Melbourne economies and the much greater employment growth has clearly driven housing values higher in these cities.
Until we see an improvement in economies outside of Sydney and Melbourne, it’s unlikely that an era of sustainable growth will return in these areas despite extremely low interest rates, which look set to move even lower over coming months.
While affording to purchase a home in Sydney and Melbourne is becoming a stretch for many, existing home owners in these cities have experienced substantial equity increases.
With rental growth and yields at record lows, it will be interesting to see if investors and upgraders in the two largest capital cities continue to show a thirst for housing in these cities given the growth phase has now been running for more than four years.
Perhaps it’s time for the buyers to look to the outer city or regional markets.
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