Home values in Australia’s capital cities have ended the year nearly 10 per cent higher after returning to growth in June.
Combined capital values rose 2.1 per cent for the month, ending the year 9.8 per cent stronger.
Based on the CoreLogic RP Data June home value results capital city dwelling values finished the 2014/15 financial year on a strong footing, with dwelling values rising 2.0 per cent over the June quarter and 9.8 per cent higher over the year.
The rate of capital gain was slightly higher over the second half of the year (5.1 per cent) compared with the first half (4.5 per cent) highlighting that the housing market has gathered some momentum during 2015.
The previous 2013/14 financial year recorded a slightly higher rate of growth at 10.1 per cent.
The interest rates cuts in February and May have contributed in pushing capital gains higher.
Growth conditions had been moderating from April last year through to the end of January 2015.
With the RBA cutting the cash rate in February, there was an instant buyer reaction across the Sydney and Melbourne housing markets where auction clearance rates surged back to levels not seen since 2009, capital gains once again accelerated and we are now seeing Sydney and Melbourne homes selling in record time; Sydney homes are selling in just 26 days and Melbourne homes are selling in 32 days.
The strength in the housing market has been diverse over the year
While Sydney and Melbourne have seen dwelling values increase by 16.2 per cent and 10.2 per cent over the financial year respectively, every other capital city has seen growth of less than 5 per cent and dwelling values are down over the year in Darwin (-2.9 per cent) and Perth (-0.9 per cent).
The current housing growth cycle clearly highlights a divergence in capital gains across the capital cities.
Since dwelling values started rising in May 2012, Sydney dwellings have seen a 43.1 per cent surge in values and Melbourne values are up by 25.9 per cent.
Despite softer market conditions in Perth, dwelling values are currently up 12.8 per cent over the cycle which represents the third highest growth rate across the capitals.
Simultaneously, Brisbane’s property market has shown the fourth highest rate of growth at 12.4 per cent, followed by Adelaide (10.4 per cent), Hobart (9.6 per cent), Darwin (8.9 per cent) and Canberra (8.8 per cent).
The three tiers of housing market performance can be best explained by economic and demographic factors where it’s no coincidence that New South Wales and Victoria are recording the strongest economic conditions coupled with the strongest rates of migration which is fuelling housing demand.
These states are more sheltered from the mining sector downturn and have benefited from the strong multiplier effect of housing construction as well as a vibrant financial services sector.
The Perth and Darwin markets are weakening in line with the downturn in the resources sector and an associated weakening in infrastructure investment and a marked slowdown in migration.
Brisbane, Adelaide, Canberra and Hobart are seeing softer economic conditions and population growth compared with Sydney and Melbourne, however housing markets have shown some level of growth over the year.
Looking at the performance of detached housing versus apartments over the financial year, houses are clearly outperforming units in the capital gains stakes.
Over the financial year, house values were 10.4 per cent higher across the combined capitals index while unit values increased by a much lower 5.6 per cent.
The same trend where houses are showing a higher capital gain than units is evident across each of the capital cities except Hobart and Darwin.
Today’s results confirm a scenario where detached housing outperforming apartments is most evident in Melbourne.
Based on the results, Melbourne house values have shown a very strong 11.2 per cent capital gain over the financial year while apartment values are up by only 2.4 per cent.
The underperformance of units compared with houses is likely due to higher supply levels for units compared with detached houses.
The Inner Melbourne unit market exemplifies the weakness in this sector where the latest CoreLogic RP Data ‘Pain and Gain’ report revealed that almost one quarter of all apartments across the Inner Melbourne region resold over the March quarter at a price that was lower than the purchase price.
Gross rental yields drifted another notch lower in June due to dwelling values rising at a faster pace than weekly rents.
Currently, the typical gross yield for a capital city house is recorded at 3.5 per cent, which is equivalent to the record low last recorded in 2007.
The average gross yield on a capital city unit also fell over the month to reach 4.4 per cent; the lowest gross apartment yield since 2010 and not far off the all-time low of 4.3 per cent recorded in 2007.
It looks likely that the pace of capital gains will remain higher than rental growth which will push rental yields even lower over the coming months.
Melbourne continues to hold the unfortunate title of the lowest yielding capital city, but if current trends continue, it won’t be long before Sydney overtakes Melbourne due to the substantially higher rate of capital gain in the face of comparatively low rental appreciation.
Brisbane is now recording the highest gross rental yield for apartments, at 5.4%, and the only capital city where gross rental yields have improved over the year has been Hobart which is now starting to rival Darwin as the highest yielding capital city for houses.
Looking forward to the next financial year, it is difficult to imagine Sydney maintaining such a rapid pace of capital gains.
Not only is affordability becoming a challenge for many sectors of the market, but yields are substantially compressed, rents are hardly moving and investors are facing tighter financing conditions from lenders.
In the absence of a trigger event, such as a sharp rise in the jobless rate, higher interest rates or an external shock, it is unlikely we will experience a significant correction in dwelling values.
However, the longer this run of growth continues across our largest capital cities, the more susceptible the housing market becomes to changes in the economy or broadly across household finance.