Melbourne and Sydney continued to set a rapid pace for capital gains in July, pushing the CoreLogic RP Data Home Value Index 2.8% higher over the month and 11.1% higher over the past year.
The two tiered growth evident across Australia’s housing markets continued through July with Sydney and Melbourne continuing as the two capital cities driving home values higher. The growth, together with new stock additions to the market, was enough to push the aggregated national value of all dwellings past the $6 trillion mark.
Index results as at July 31, 2015
According to Tim Lawless, CoreLogic RP Data’s head of research, the total aggregated value of Australian housing has increased by just over half a trillion dollars over the past twelve months.
Twelve months ago, CoreLogic RP Data estimated that the gross value of the total residential property asset class was $5.5 trillion. In July 2015 our estimates have now reached $6 trillion as a result of value growth and dwelling construction. Based on APRA data through to March, approximately $1.3 trillion of bank debt remains outstanding against the asset class. Taking into account housing debt from the non-bank sector as well suggests that the overall debt to valuation ratio across the national housing portfolio is likely to be around the mid 20 per cent mark."
Focusing on value growth, Melbourne traded places with Sydney over the past three months to record the highest rate of capital gain. Dwelling values in Melbourne surged 6.1 per cent higher over the three months ending July 31; the highest rolling quarterly rate of growth since the three months ending August last year when values grew 6.4 per cent over that period. According to Mr Lawless, growth in Sydney wasn’t quite as strong over the rolling quarter, recorded at 5.4 per cent, which is the highest rate of growth since the March quarter this year (5.8 per cent).
"To date, the capital cities have seen remarkable differences over the growth cycle which broadly commenced at the end of May 2012 and since that time dwelling values across our combined capitals index have increased by 30.4 per cent. Sydney values are 47.9 per cent higher over the current cycle and Melbourne values are 32.1 per cent higher while every other capital city has seen growth of less than 13 per cent over the same period. This highlights the extent to which the Sydney and Melbourne markets have outperformed other markets over the past three years.
"Over the past twelve months, we’ve seen several cities enter a correction phase with Darwin values falling the most, down by 5.3 per cent. Perth values also drifted lower over the year, down 0.3 per cent. At the same time, the annual rate of capital gain in Sydney reached a new cyclical high with dwelling values moving 18.4 per cent higher over the year; the highest annual rate of growth for Sydney since the twelve months ending December 2002.
According to Mr Lawless, the strongest growth conditions outside of Sydney and Melbourne have been in Brisbane where dwelling values were 3.9 per cent higher over the year. "While Sydney and Melbourne values continue to boom, the next best performing city, Brisbane, has seen dwelling values rise by just 3.9 per cent over the past twelve months. Based on the median dwelling price, Sydney prices are now 72 per cent higher than Brisbane’s and Melbourne’s are 24 per cent higher," he said.
Detached housing continued to outperform the unit sector, with house values substantially outperforming unit values over the past year.
"Across every capital city except Hobart and Darwin, we are seeing detached housing outperform units for capital gain, with house values up 11.6 per cent compared with a 7.2 per cent increase in unit values over the past year. The differential is most pronounced in Melbourne where house values have surged 12.3 per cent higher over the year compared with a 4.8 per cent rise in unit values.
"The higher growth rates for houses compared with units is likely to be supply-related, with the underlying land component driving detached housing values higher at a time when new apartment supply has seen a substantial boost from new construction," Mr Lawless said.
While dwelling values continue to rise across most cities, the pace of rental growth has slipped to a new record low, which has caused further compression of rental yields.
Capital city rents increased by just 0.9 per cent over the past twelve months, the slowest pace on record. A lack of any meaningful rental growth at a time when dwelling values are rising by more than 11 per cent over the year has pushed gross rental yields to new record lows across the combined capital city measure according to Mr Lawless.
On a city by city basis, record low gross rental yields are evident for Sydney houses (3.2 per cent) and Melbourne houses (3.0 per cent) while unit dwellings in the same cities are only a few basis points away from new record lows. Mr Lawless noted that these are also the cities where investors are most active, indicating the low yield profile hasn’t been enough disincentive to keep investment at bay in these markets.
"When you consider that Sydney rents have increased by just 2.5 per cent over the past twelve months while values have climbed 18.4 per cent higher, it is easy to see how yields are getting squashed," he said.
The only capital city where yields haven’t deteriorated over the year is Hobart where rental growth has kept pace with value growth.
Mr Lawless said, "With value growth once again accelerating across Sydney and Melbourne, the market evolution in mortgage lending policies will will provide a timely test for housing demand, particularly from investors."
"The combined effect of tighter lending parameters with more focus on serviceability and low LVR’s, potentially higher mortgage rates for investment loans as well as limitations on the pace of investment lending imposed by APRA on Australia’s banks should conspire to slow investor demand in the market.
"Add to this the growing concern about the Sydney and Melbourne housing markets being overheated and the record low rental yields and the outlook being painted for investment is likely to be one of diminishing demand," he said.