Dwelling values have continued to rise over the past year however, there are increasing signs that the housing market has turned with Sydney leading the slowdown. Over the third quarter of 2017, national dwelling values increased by 0.5% which was their slowest quarterly rate of growth since the June 2016 quarter. The 8.0% rise in values nationally over the year was also the slowest rate of growth since February 2017. Although values are continuing to rise, they are doing so at a slow rate.
There is a growing disparity between the growth performance of the two largest capital cities. Sydney dwelling values increased by 0.2% over the September 2017 quarter which was the cities slowest quarterly rate of growth since May 2016. At the same time, Melbourne dwelling values increased by 2.0% which is down from the recent peak rate of quarterly growth of 4.8% in November 2016 but is still well in excess of Sydney’s growth. Across the remaining capital cities, values increased over the quarter in Brisbane (0.5%), Adelaide (0.3%), Hobart (3.4%) and Canberra (1.3%) but fell in Perth (-1.3%) and Darwin (-4.0%).
Over the past 12 months, Sydney (10.5%), Melbourne (12.1%) and Hobart (14.3%) have recorded double-digit value growth while values have also risen in Brisbane (2.9%), Adelaide (5.0%) and Canberra (7.8%). Values have fallen over the year in Perth (-2.9%) and Darwin (-4.7%).
The recent slowing of value growth nationally comes on the back of a strong phase of growth which has been led by Sydney and Melbourne. The surge in dwelling values has occurred against a back-drop of low inflation, low mortgage rates and historically weak income growth and as a result, housing affordability has deteriorated substantially in Sydney and, to a lesser extent, in 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. Developers have built new product on the back of 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 and tax deductibility of investment costs. 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 their principal. This has also occurred in line with a pullback in new housing construction. Although both investment and construction activity is slowed both have recently stabilized at levels well above the long-term average.
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 2.9% compared to an increase of 0.9% at the same time last year. A similar trend has been evident across all capital cities. 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 AirBNB is 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.
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. 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. There is now some clear evidence that growth conditions have slowed in each of these cities with Sydney’s housing market slowing much more rapidly than Melbourne’s.