National housing conditions hold steady despite Sydney's slowdown

Market conditions slowed in Sydney while Hobart emerged as the country’s best-performing capital city based on growth in dwelling values over the past 12 months, according to CoreLogic's August home value index.

National dwelling values remained flat during August as capital city values edged 0.1 per cent higher and regional values slipped 0.2 per cent lower, CoreLogic’s upgraded Hedonic Index showed.

CoreLogic head of research Tim Lawless said that this “steady” result provides further evidence that the housing market has moved through its peak growth phase.

“We’re seeing capital gains in markets like Sydney, which were previously very strong, now being weighed down by affordability constraints and tighter lending conditions,” Mr Lawless said.

“The knock-on effect is a curb in investment credit growth and higher mortgage rates for investment and interest-only mortgages.”

He said that values rose to their lowest rolling quarterly rate since June last year, at just 0.5 per cent.

The slowdown in growth conditions is most visible in Sydney, where housing values had been growing strongly. Since values started rising in 2012, the typical Sydney dwelling has seen its value rise by 75 per cent, equating to an approximate dollar value gain of $521,000 on the median dwelling valuation.

Sydney

Sydney’s quarterly growth rate peaked over the three months ending October 2016 when dwelling values jumped by 6.3 per cent. Since that time, the rolling quarterly rate of appreciation in Sydney dwelling values has consistently eased, reaching the current rate of just 0.3 per cent.

Melbourne

In Melbourne, the housing market has been more resilient to a slowdown. This is evident in the Hedonic Index results as well as auction clearance rates, which have consistently been above 70 per cent. Inventory levels also remain exceptionally tight across the Melbourne market.

Melbourne’s quarterly rate of growth has slowed since peaking at 4.4 per cent in November last year. However, the most recent three-month period has seen dwelling values rise by 1.9 per cent, less than half the peak rate of growth but substantially higher than Sydney’s pace of capital gains.

Hobart

While the trend in capital gains has eased across the largest capital cities, in Hobart the market has gathered some momentum. The annual pace of capital gains, at 13.6 per cent, is now the highest of any capital city.

Mr Lawless said that the annual growth rate for Hobart hasn’t been this high since 2004.

“The sheer affordability of housing is likely one of the key drivers for Hobart’s values appreciation,” the research head said.

With a median house value of just $403,174, Hobart houses are approximately half the value of Melbourne's and almost two-thirds lower than Sydney house values.

In addition to the strong capital gains, Hobart rental rates have also risen, providing a solid rental yield and pushing the total return well beyond the other capital cities.

Perth and Darwin

In Perth and Darwin, housing values have continued to trend lower over the past month and rolling quarter. However, the annual trend highlights that the rate of decline has been easing. Since peaking in 2014, Perth dwelling values have declined by a total of 10.8 per cent, while the cumulative decline across Darwin has been more severe, with values down by 18.6 per cent from the market peak.

“The silver lining around the decline in values is a substantial improvement in affordability,” Mr Lawless said.

“Based on a dwelling-price-to-income ratio, Darwin is Australia’s most affordable capital city with a ratio of 4.4. This means dwelling prices are typically 4.4 times higher than gross household incomes across the city.”

Rents

Rental yields slipped to a new record low across Australia in August.

Nationally, the gross yield on a dwelling reduced to 3.62 per cent in August, down from 3.87 per cent in August last year.

“Record low yields are largely a capital city phenomenon, with yields across the combined regional areas of the country tracking 165 basis points higher than the combined capital city yield,” Mr Lawless said.

While there was a reduction in gross rental yields across each of the capital cities over the past 12 months, only Melbourne (2.9 per cent) and Sydney (3.0 per cent) are recording rental yields at record lows.

Mr Lawless said that to provide some context about why yields are so low in these cities, consider that dwelling values in both cities are up by approximately 13 per cent over the past 12 months while rents only increased by 4.7 per cent across Melbourne and 4.0 per cent across Sydney.

“The imbalance between rental growth and value growth has been a constant feature of the housing market over the growth cycle to date,” he said.

“However, with the pace of capital gains easing at the same time that rents trend higher, the Sydney and Melbourne markets could be approaching the bottom of their yield cycle.”

[Related: Sydney market at end of cycle, says McGrath]

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Tim Neary

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