Over the past 6 and a half years Sydney and Melbourne have continued to drive the growth in the capital city housing market and at the moment that shows little sign of changing.

Over the past 6 and a half years Sydney and Melbourne have continued to drive the growth in the capital city housing market and at the moment that shows little sign of changing.

Throughout the 2014-15 financial year, combined capital city home values increased by 9.8% according to the CoreLogic RP Data Home Value Index. It’s important to remember that the index is stock weighted and as such it is most heavily influenced by the larger housing markets.

Capital city home values have for a long time trended much higher. According to the CoreLogic RP Data Home Value Index, since the end of 1995 (when the Index commenced) combined capital city house values have increased by 436.6% and unit values are up 330.4%. As the first chart shows there have been periods where values have fallen however, values largely continued to rise over that time despite variances across specific cities.

 

Combined capital city house and unit values over time

 

Over the past financial year the rate of capital growth for homes in Sydney and Melbourne has been substantially greater than the change in values across the remaining capital cities. This has been an ongoing trend since the falls during the financial crisis ended at the end of 2008. Over the 6 and a half years since the end of 2008, value growth in Sydney and Melbourne has stood head and shoulders above all other cities,

Throughout 2008 as the financial crisis was unfolding there was concern that Australian home values would fall sharply. Although values fell it was a fairly short correction with values falling by -6.1% over the 9 months to December 2008. A significant stimulus package which included generous handouts to first home buyers along with aggressive interest rate cuts resulted in growth in home values thereafter.

 

Change in capital city home values over the 2014-15 financial year

 

Over the initial growth phase after 2008 it was Melbourne that recorded the strongest rate of capital growth. Eventually interest rates were lifted and first home buyer incentives were wound back and this resulted in a slowing housing market with values eventually falling. Over the past three years we’ve seen further growth in home values on the back of a renewed interest rate cutting cycle however, Sydney has recorded the strongest capital growth over the recent phase followed by Melbourne.

 

Change in capital city home values from December 2008 to June 2015

 

 

Combined capital city home values have increased by 43.1% between December 2008 and June 2015. The only two capital cities that have recorded growth in excess of this figure are Sydney (68.8%) and Melbourne (54.1%). Across the remaining capitals growth has been more moderate at: 8.9% in Brisbane, 12.4% in Adelaide, 14.3% in Perth, 0.2% in Hobart and 22.2% in both Darwin and Canberra.

Since the financial crisis we've seen residential unit construction surge to record high levels. While we are seeing an ongoing evolution towards higher density development in our capital cities, units continue to appreciate in value at a slower pace than houses. Since the end of 2008, combined capital city house values have increased by 44.0% compared to a 36.8% rise in unit values. Across each individual capital city except Darwin the cumulative growth for houses has been greater than it has been for units. This would seem to suggest that despite more units being built most buyers still show a preference for a detached house. Additionally, the higher supply levels in the apartment sector can probably be attributed to the slower pace of appreciation.

 

Change in capital city house and unit values from December 2008 to June 2015

 

Following the recent trend, Sydney and Melbourne remain the strongest housing markets for capital growth and we expect this to continue over the coming financial year. While low mortgage rates clearly play a part in this growth, they are available nationally so they alone don’t explain the much stronger demand in the two largest cities. Stronger job creation, more diversified economies, growing demand from overseas buyers and stronger population growth are additional factors which are propelling Sydney and Melbourne home values higher. We expect that most of these factors will continue to drive these markets over the coming year while affordability factors, which are becoming stretched, ae likely to result in a slowing of this capital growth throughout the 2015-16 financial year.

 

Article by Cameron Kusher, CoreLogic RP Data senior research analyst.

 

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