Dwelling values continued their upwards trend, with the RP Data–Rismark combined capital city index posting a 1.2% capital gain in January.
According to Australia’s most timely indicator of housing market conditions, the RP Data-Rismark Home Value Index, a 1.2 per cent rise in capital city dwelling values was recorded over the month of January with a 2.7 per cent rise for the three months to end of January.
The latest Index results revealed that capital city dwelling values increased by 13.2 per cent since the beginning of the current growth cycle back in June 2012 and are now 4.8 per cent higher than their previous peak in October 2010.
Capital city housing markets continues to be a mixed bag.
Sydney and Melbourne were the clear drivers for capital gains over the past year, with values up 13.4 per cent and 11.9 per cent respectively over the twelve months ending January 2014. Excluding Perth, every other capital city has recorded growth of less than five per cent over the past year.
These latest housing market results are likely to dampen further speculation around a cut to interest rates over the short to medium term.
Together with the higher than expected inflation reading and a lower Aussie dollar, the sustained growth in dwelling values is another factor the RBA is likely to consider when deliberating on any movement in the cash rate.
The results confirmed that Sydney and Melbourne are now well advanced in their growth cycle.
I expect that the current exuberant conditions will wind down over the coming year due to the very low yield environment, increasing affordability constraints and higher levels of housing supply impacting the market.[sam id=41 codes=’true’]
Melbourne, where values were up 3.4 per cent over the three months ending January 2014, continues to offer an upside surprise with strong capital gains recorded despite the city showing the lowest rental yields of any other capital and a lift in supply across the inner city and outer fringe housing markets.
Local dwelling values also surpassed their previous 2010 market peak and are now 2.6 per cent higher than the previous record highs.
Rismark’s CEO, Ben Skilbeck, says that “while a moderation in growth is expected for Melbourne and, to a lesser extent, Sydney, strong population growth, an increasing appetite for housing credit and positive consumer sentiment means we are unlikely to see price declines in the near term.
Growth in outstanding housing borrowings has increased meaningfully from its lows. Most noticeable is investor borrowing which for the calendar year 2013 grew by 7% compared to 3% in 2011.
While we are yet to observe a significant increase in owner occupier borrowing, lending commitments to this segment for the month of November, the latest available, are 19% higher than the same time last year.”
The premium sector of the housing market has gathered pace over the past six months and is now showing the highest capital gains compared with the broad middle segment and most affordable segments of the housing market.
Dwelling values across the most expensive quarter of the capital city markets were up 6.7 per cent over the past six months (compared with 5.8 per cent growth across the broad mid-market and 4.7 per cent growth at the most affordable quarter of the market).
Similarly, premium dwelling values have risen by 10.1 per cent over the past twelve months compared with a 9.5 per cent and 7.5 per cent capital gain across the mid-market and most affordable quarter of the market respectively.
Rental rates continued to grow at a slower pace than dwelling values and further eroded rental yields across the capital cities.
The markets where dwelling values have shown the most appreciation, Melbourne and Sydney, are now showing gross yields for houses below 4 per cent while the typical gross yield on a Melbourne and Sydney unit are higher at 4.2 per cent and 4.7 per cent gross respectively, however, they are lower than in all other capital cities.
Such a yield environment may potentially start acting as a disincentive to investors.
With gross yields low in Melbourne, and not a lot better in Sydney, together with the fact that both these markets are well advanced in their growth cycle, it would suggest that investment fundamentals in these markets are waning. It is my view that investors will start seeking out the higher yields of Brisbane where the market is also far earlier in the growth cycle.
According to Mr Skilbeck, “when Sydney’s recent growth is put into the context of the past 10 years, continued momentum, albeit at a slower pace than the past six months, is expected. Sydney’s annualised 10 year growth to 31 January 2013 is a very modest 3.0%, less than half the rate of national household disposable income growth over the period.
The same argument, however, does not apply to Melbourne which has had 6% annualised 10 year growth and today has the worst rental yields of the capital cities.”