The CoreLogic Quarterly Housing & Economic Review is a breakdown of the activity across each of the capital cities over the quarter to April 2017 and also dives into the economic factors that contribute to the overall performance of the market.
Although the current housing market growth phase is closing in on five years, the rate of growth actually accelerated over the first quarter of 2017 with combined capital city dwelling values 12.9% over the 12 months to March 2017 according to the CoreLogic Home Value Index. At the end of March, the combined capital city index was increasing at its fastest annual pace since May 2010. The ongoing increase in dwelling values has resulted in the total value of residential property nationally rising to $7.0 trillion.
Four of the eight capital cities have recorded annual value growth of more than 10% over the past year with values in Sydney (+18.9%) rising at their fastest annual pace since November 2002, Melbourne values (+15.9%) have increased at their fastest pace since August 2010 and Canberra values (+12.8%) are rising at their fastest pace since July 2010. Values have also increased over the year in Brisbane (+3.7%), Adelaide (+3.4%) and Hobart (+10.2%) while they have fallen in Perth (-4.7%) and Darwin (-4.4%).
Following dwelling value falls of around 6% during the financial crisis, combined capital city dwelling values have now increased by 68.5% since the end of 2008. While this suggests a strong market, it has been significantly influenced by growth in Sydney (+109.2%) and Melbourne (+92.4%) with Canberra recording the third highest rate of growth over the period at 39.6%. All other capital cities have seen dwelling values rise by less than 20.0% since the end of 2008.
The ongoing rises in home values are being supported by a low cost of borrowing (although mortgage rates are now starting to increase), strong total returns (in certain cities) and positive demographic and economic trends prevalent in Sydney and Melbourne. Given these factors look set to continue,
at least for the short term, we are expecting that values will continue to rise over the coming year although we are expecting some heat to come out of the rate of growth due to recent moves made by the banking regulator and the growing affordability challenge for purchasers.
As values have increased, the level of housing construction has also risen, as has participation from the investor segment of the market. While house construction has increased over recent years, it has been the surge in unit construction which has really altered the housing landscape. The last Census showed that units were more than twice as likely to be owned by investors as houses and with investor borrowing surging over recent years it is reasonable to conclude that many of these units have been purchased by investors. The other factor which is unclear is the magnitude of purchasing by offshore investors, official data is infrequent but it shows that there has been a surge in offshore investment over recent years. The surge in unit construction is already leading to units increasing in value at a slower pace than houses across a number of capital cities.
The rental market is already showing the effects of the surge in new housing supply with rental growth having slowed markedly over recent years. With more stock in the pipeline, it is anticipated that rental growth is set to remain quite weak over the coming years. The other factor to watch will be what happens to vacancy rates as more rental stock hits the market over the coming years.
Capital city dwelling values have now been rising for almost five years and the rate of growth has accelerated in Sydney and Melbourne. While lower mortgage rates have improved mortgage serviceability, for those that don’t own a home it is increasingly difficult for them to firstly save a large enough deposit and secondly to compete with the equity that current home owners have built over recent years. The housing market conditions prevalent in Sydney and Melbourne are not prevalent across the rest of the country however, these cities are being supported by strong economic and demographic conditions which are fuelling mortgage demand.
Mortgage rates have clearly played a role in driving housing demand in Sydney and Melbourne but the relatively weaker economic conditions outside of these two cities have dampened housing demand elsewhere. With affordability becoming stretched we are seeing increasing pushes for housing market reform from Government. These calls are expected to only grow louder the longer the current growth conditions persist.