While dwelling values increased in 2017, there was a notable slowing of the market late in the year, culminating in national values falling by -0.3% over the final quarter of the year. This represented the largest (and first) quarterly fall in dwelling values since the three months to April 2016.
Throughout 2017, national dwelling values increased by 4.2% which was down from 5.8% at the end of 2016 and the slowest rate of annual growth since October 2016. Importantly there was a noticeable slowing through the year once annual growth peaked at 10.4% in May 2017.
Sydney, which accounts for almost one third of the total value of housing nationally, is leading the slowdown with values falling by -2.1% over the final quarter of 2017. Most other capital cities have also experienced a slowing of the rate of value change over recent quarters. In fact, only Perth and Darwin, where home values have been in decline since 2014, have recorded an improvement in housing performance over the final quarter of the year compared to the third quarter.
Outside of Sydney, dwelling values have increased over the quarter in Melbourne (0.9%), Brisbane (0.3%), Adelaide (0.3%), Perth (0.1%), Hobart (3.1%) and Canberra (1.0%) and have fallen in Darwin (-2.9%). Over the 2017 calendar year, values have fallen in Perth (-2.3%) and Darwin (-6.5%) and have increased in Sydney (3.1%), Melbourne (8.9%), Brisbane (2.4%), Adelaide (3.0%), Hobart (12.3%) and Canberra (4.9%). The recent slowing of value growth nationally comes after a strong phase of growth which has been led by Sydney and Melbourne.
The past few years have also been characterised by high rates of population growth nationally and a heightened level of new housing construction activity, particularly for units. The construction boom has facilitated an increase in dwelling accommodation however, it has also occurred at the same time as historic high levels of investment activity in the housing market, with investment largely focused within Sydney and Melbourne.
Residential developers have ramped up the construction of new dwellings, supported by strong demand for their stock, with much of this demand coming from investors that have been attracted by the strong capital gains on offer in Sydney and Melbourne as well as tax deductibility of investment costs. Over the period Australia has also seen a sharp rise in the level of foreign investment in housing stock. More recently investment has slowed due to a combination of credit rationing and higher mortgage rates for investors as well as those not paying down the principal on their mortgage. This has also occurred in line with a a slight pull-back in new housing construction however, approvals are now climbing again. Although both investment and construction activity has slowed both remain substantially higher than long-term average levels.
CoreLogic previously had concerns that heightened levels of new housing construction and investor participation would cause rents to fall and a year ago rental growth was slowing across most regions of the country. Over the past year though, there has been an acceleration in rental growth with the rents increasing by 2.7% over the year. A similar trend has been evident across all capital cities however, the rate of growth now appears to be slowing. Exactly what has driven this acceleration is unclear however, it is probably due to a number of factors including: rapid population growth and the sheer lack of affordability of owning a home.
Furthermore, the rising popularity of AirBnBis potentially resulting in some level of stock removal from the long-term rental market and increasing supply in the short-term market. Additionally, as mortgage rates edge higher, particularly for investment mortgages, it is likely that landlords will be doing their best to recoup their higher cost of debt by pushing rents higher if possible.
Capital city dwelling values have now been rising for more than five and a half years and the rate of growth in Sydney and Melbourne has been significantly greater than that outside of these two cities. 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. More recently the housing market has slowed due to a range of factors including tighter credit policies, stretched affordability, supply additions and higher mortgage rates for investors. As a result the market is expected to continue to transition in 2018 with falls potentially set to continue in Sydney while conditions across Melbourne’s housing market are also expected to slow further.