Housing market and Economic Update | Chart Pack July 2016

It’s time for our monthly whip around the country to see how our property markets are performing and to look at the factors affecting their future.

CoreLogic recently released their chart pack for June which gives us a good overview of what’s happening as well as some of the economic factors impacting our markets.

Home values increased by 0.5% in June 2016 with values 3.8% higher over the three months to June 2016

• Combined capital city home values increased by 0.5% in June however, values rose in only Sydney, Melbourne and Hobart
• Home values were 3.8% higher over the three months to June 2016 and Perth and Darwin are the only two capital cities in which home values have fallen
• Over the first six months of 2016, capital city home values have increased by 5.5% and Perth and Darwin are the only cities in which values have fallen
• Over the past 12 months, combined capital city home values have increased by 8.3% which represents a slowdown in annual growth from the previous two financial years.
• Across the individual capital cities, the annual change in home values have been recorded at 11.3% in Sydney, 11.5% in Melbourne, 5.3% in Brisbane, 2.2% in Adelaide, -4.7% in Perth, 6.2% in Hobart, -1.1% in Darwin and 3.9% in Canberra

The Markets have slowed down:

Clearly our markets have entered the next stage of the property cycle, with capital growth slowing to a much lower rate than in the last few years, but there has been a rebound in the strength of our markets over the last month.

The monthly growth rate reduction is likely to be very much welcomed by state and federal government policy makers and regulators who may be concerned about a sustained rebound in capital gains.

This graph gives an overview of the whole Australian market and we’ll look at how the individual State markets perform in a moment:

What the chart above doesn’t really show is who fragmented our property markets are.

As an example, Sydney home values have been rising for four years, and have increased by a cumulative 59% over this time frame and Melbourne dwelling values have been rising for the same length of time and have moved 41% higher over the growth cycle to date.

Melbourne has been the strongest growing property market, not only over the last 12 months but over the last decade with Sydney coming in a close second:

Home sales have trended lower over recent months

• Over the 12 months to June 2016 it is estimated that there were 328,180 houses and 127,243 units sold nationally with house sales -7.6% lower and unit sales -13.7% lower over the year
• Across the combined capital cities there were an estimated 198,814 houses and 91,949 units sold over the 12 months to June 2016. House sales are -10.8% lower over the year while unit sales are down -16.5%.
• Most capital cities are seeing the number of sales trending lower however, there are signs in Perth and Hobart, where home values are falling, that sales volumes are stabilising and potentially increasing a little.
• It is important to note, the large volume of off-the-plan sales currently means there is a high likelihood unit sales volumes will be revised higher over the coming years

The Rental Market is weak

Rental yields are generally low across all of the capital cities, however, it is only in Sydney and Melbourne where yields for both houses and units have dropped to new record lows.

Melbourne remains the lowest yielding market for houses, averaging 2.9%, whilst unit yields are now lowest in Sydney and Darwin, averaging 3.9%.

Despite low mortgage rate settings, the low yield profile implies that the majority of recent investors will be experiencing a cash flow loss on their property after expenses are taken into account.

Weakest rental market on record: [adrotate group=”15"]

• Combined capital city house rents are currently recorded at $487/week while unit rents sit at $469/week.
• House rental rates have fallen by -0.9% over the past year (largest fall on record) while unit rents have increased by 1.5%
• In Brisbane, Adelaide, Perth and Darwin, rental rates have fallen over the year for both houses and units.
• Aside from Hobart, where rental rates are up 3.6% over the year, no other capital city is recording rental growth in excess of 2.0%
• The current movement in rental rates, coupled with value growth have resulted in rental yields trending lower over the year
• Gross rental yields for houses are currently recorded at 3.2% and unit yields are 4.1%, both of which are record lows
• 12 months ago gross rental yields were recorded at 3.5% for houses and 4.4% for units

Other signs of our slowing property markets:

We’re seeing homes in the city taking longer to sell and vendors are starting to offer larger discounts on their asking prices in order to make a sale.

The typical Sydney home is now taking 40 days to sell compared with 26 days a year ago and discounting rates have risen from 5.5% a year ago to 5.6%.

At the same time there are 6.6% more properties for sale than this time last year:

INVESTOR PARTICIPATION HAS FALLEN

APRA seems to have achieved what it wanted.

Investors, who were dominating our property markets last year, are now finding it difficult to get finance resulting in investor participation levels today being back around the average level for the last decade:

The following graphs show lending growth to investors falling.

This is a leading indicator — a sign of what’s ahead (as investors generally obtain their finance pre approval is prior to purchasing) — suggesting quieter times ahead for our property markets.

WHAT’S HAPPENING AROUND THE STATES?

The Sydney property boom is over, but its fundamentals are still strong and after a slight retracement at the beginning of the year, Sydney’s price growth has resumed at a much more sustainable level:

The Melbourne property market was the strongest performing property market over the last 12 months, but this year capital growth has slowed to a more sustainable level.

Strong population growth (around 2.1% per annum) and a relatively strong economy creating more jobs have underpinned the Melbourne property market.

Brisbane’s property market grew a respectable 2.2% over the past quarter:

Adelaide property values only increased 2.2% over the last year.

The little flurry Adelaide experienced at the beginning of the year seems to have run its course and house prices have only increased 7.3% over the last five years.

The Perth property market is still in its slump phase with a significant oversupply of properties for sale and values still falling.

Similarly the oversupply of rental properties in Perth is causing rents to fall.

I believe there is still some downside to the Perth market as it works its way through the excesses of the mining boom:

Similarly there are few growth drivers for Hobart property prices, and even though some commentators are suggesting it’s a good place to invest “because it has to catch up”, with minimal population growth and slow economic growth there seems little reason for property values in Hobart to grow substantially.

It’s growth spurt seems to have slowed down and Hobart has underperformed over the last decade with property prices only increasing 14% over the last 10 years.

Darwin property values are lower than they were 12 months ago, and like Perth, I believe there is more down side yet to come.

The Canberra property market is likely to remain in limbo for the next few months, because even though the results of the Federal Election are in, how things will play out is still unclear.

Economic data remain mixed

• New lending to both investors and owner occupiers has fallen from recent peaks with investor lending recording a much greater decline
• Total housing credit is rising however, investment credit growth continues to slow and is now well below APRAs 10% threshold for annual growth
• The rate of population growth at a national level is trending lower although it did pick-up slightly over the December 2015 quarter
• Dwelling approvals fell in may but remain at extremely elevated levels
• Consumer sentiment was more optimistic than pessimistic in June despite no interest rate cuts and a looming federal election
• The unemployment rate was recorded at 5.7%, unchanged for the past three months and remaining at its lowest level since September 2013
• The Reserve Bank made no change to official interest rates in June

An important factor affecting our property markets is consumer sentiment.

When we feel confident we tend to go out and spend, but when we fell less secure about our jobs or our future we tend to put off major purchase decisions like buying a new home or investment property.

It’s likely consumer confidence will slowly pick up now that the result of the Federal Election has been confirmed.

As you can see from the graphs below, there is a strong correlation between consumer sentiment and dwelling sales and property value

A positive sign for our property market is is jobs growth and low unemployment levels at a time when the participation rate (the percentage of the population working) has increased:

Low mortgage rates (and the hint of more rate cuts to come) are also positive for property:

Source of graphs: Corelogic

WHAT ARE YOU GOING TO DO?

The trend for capital growth has dropped from the peaks of 2015, but dwelling values continue to track higher across our capital cities other than Darwin and Perth, however the markets remain very fragmented.

If you’re looking for independent property investment advice, no one can help you quite like the independent property investment strategists at Metropole.

There are still great property opportunities out there, but there are also more traps than ever.

Why not have a chat with the team at Metropole about your options.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.

Originally published at Property Update.