National dwelling values nudged 0.1% lower in April, the seventh consecutive month-on-month fall since values started retreating in October last year according to the CoreLogic April home value index results out today.
Similar to previous months, CoreLogic found that the declines were concentrated within the largest capitals, while regional dwelling values edged 0.4% higher.
Capital city dwelling values were 0.3% lower over the month, driven by larger falls of -0.4% in Sydney and Melbourne and a smaller decline in Brisbane values (-0.1%).
The falls were offset by flat conditions in Perth and subtle rises in Adelaide (+0.1%), Darwin and Canberra (both +0.6%).
Hobart was the only city where dwelling values rose by more than 1% in April.
On an annual basis, the combined capitals recorded the first decline in dwelling values since late 2012, with values slipping 0.3% lower, driven by falls in Sydney (-3.4%), Perth (-2.3%) and Darwin (-7.7%).
The only capital city to see an improvement in annual growth conditions relative to a year ago is Perth, where the rate of decline has slowed from -3.0% last year to -2.3% over the past twelve months.
A reversal of longer term trends, at a macro level, the latest trends are virtually the opposite of what we have become used to over the past five or so years.
Regional areas are now outperforming the capitals and units are outperforming houses.
Also the most expensive properties are now showing weaker conditions than the more affordable ones.
Regional areas now outpacing the capital cities.
The past five years has seen combined capital city dwelling values appreciate at the annual rate of 6.8% which is almost double the annual rate across the combined regional markets at 3.5%.
The past twelve months has seen capital city dwelling values fall by 0.3% while regional values are 2.4% higher.
Unit values outperform house values Similarly, capital city detached house values have recorded an average annual growth rate of 7.3% over the past five years, while unit values were up 5.5% per annum over the same period.
Despite the surge in unit construction over recent years, the past twelve months has seen unit values continue to trend higher, up 1.9%, compared with a 1.0% fall in house values.
More affordable housing stock has been resilient to value falls Across the most expensive quarter of the market, dwelling values have increased at almost twice the pace of the most affordable quarter over the past five years, up 8.2% per annum compared with 4.4% per annum.
As conditions have slowed down, it’s been the most affordable end of the housing market where values have remained resilient to falls, trending 1.9% higher over the past twelve months while the most expensive quarter of properties has seen values fall by -1.6%.
Trends across capital city sub-regions: Although annual capital gains have slowed to 3.7% across Melbourne, many of the city’s sub-regions still dominate the top 10 for growth in dwelling values over the past twelve months, with six of the top ten located around Melbourne’s outer metropolitan areas.
While Hobart tops the list for best growth over the past twelve months at 12.7%, three of Melbourne’s sub-regions (Melbourne West, Mornington Peninsula and Melbourne North West) are still recording annual capital gains higher than 9%.
The weakest performing sub-regions are now heavily concentrated around Sydney, with eight of the ten weakest performing capital city sub-regions nationally located across the Sydney metropolitan area.
Trends across regional markets: After recording a softer performance for most of the past thirteen years, the combined regional markets are now consistently outperforming the capitals; a trend that has been evident since September last year, with a widening gap in performance since that time.
The outperformance across regional markets is mostly attributable to stronger conditions across the larger regional centres located within close proximity to the three major capitals, as well as improving conditions across many of the lifestyle markets.
Additionally, although values remain lower over the year, many of the mining regions, where values have seen substantial declines, have now levelled out or seen some growth in values, helping to reduce the drag on headline growth rates.
Rental conditions: Nationally, weekly rental rates are now rising at the annual pace of 2.0%, the same rate of growth as a year ago, but slower than seven months ago when the annual pace of growth was tracking at a recent high of 2.9%.
The slowdown in rental growth is once again attributable to slower rental conditions across the capital cities, where annual rental growth has eased from 2.8% in September last year to 1.7% over the twelve months ending April 2018.
Despite the slower pace of rental growth, every capital city, apart from Sydney, is now seeing rents rise at a faster rate than the five year average.
Slower rental growth, particularly in Sydney, is most likely a factor of higher levels of investment which has supported a rise in rental stock combined with a surge in first home buyers which has detracted from rental demand.
Annual growth in rents for regional dwellings has been trending higher to reach 3.1% over the twelve months ending April 2018; the fastest annual rate of growth since May 2012.
With dwelling values now falling or rising at a slower rate than rents, gross rental yields are generally tracking higher.
In the lowest yields markets, Melbourne and Sydney, dwelling rents have lifted from their record lows, but remain well below the long run average.
In Melbourne, gross dwelling yields bottomed out at a record low of 2.88% in November last year and have since crawled higher to reach 2.96%.
In Sydney, gross dwellings yields reached a record low of 3.04% in August last year and have showed a subtle repair, rising to 3.21% at the end of April this year.
In Summary, while values are trending lower, CoreLogic confirmed that the rate of decline has remained moderate.
Weaker housing market conditions are primarily a factor of tighter credit policies which have dampened investment activity.
Annual growth in investor housing credit was just 2.5% over the twelve months to March ’18.
Considering investment activity has been substantially concentrated in Sydney and, to a lesser extent, Melbourne, it makes sense that these two markets would feel the brunt of tighter credit conditions for investment lending.”
The slowdown in investment activity has been partially offset by a uptick in owner occupier lending, driven by a surge in first home buyer activity in New South Wales and Victoria.
Annual growth in owner occupier housing credit, at 8.1% over the twelve months to March ’18, is the fastest pace of growth since late 2016.
With the recent announcement by APRA that the ten percent speed limit on investment lending would be lifted from July 1 for lenders who can prove they have met ARPA guidelines over the past six months, it would be intuitive to assume investment activity may lift, however that isn’t likely to be the case.
In fact, borrowers may face tighter lending conditions as banks focus more on debt servicing and ensuring expenses are more comprehensively assessed and adequately allowed for.
While credit conditions are likely to remain tight and potentially tighten further as the Royal Commission unravels, low mortgage rates are expected to help to keep a floor under housing demand.
With the Reserve Bank meeting today, it’s virtually guaranteed that the cash rate will remain on hold and the Bank will reiterate a neutral policy stance for the foreseeable future.
While the next interest rate move is likely to be up, financial markets are still indicating the first hike won’t be until July 2019.
Another factor supporting a soft landing in the housing market is high overseas migration, particularly into New South Wales and Victoria as well as strong interstate migration flows, especially into Queensland, Victoria and Tasmania.
Increasingly there is talk about reducing Australia’s migration intake, should this occur it would likely result in reduced demand for housing, particularly in New South Wales and Victoria which see the strongest levels of overseas migrant arrivals.
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