CoreLogic’s July housing market review a slowdown in the pace of capital gains seen over the most recent three months of data
Potentially we may see investment demand deflect to other markets where rental yields are higher and capital gains are earlier in the growth cycle. As the market develops so quickly, it is recommended to stay up to date with all the latest housing market research.
We’ve included the national property market video below, along with the transcript.
Welcome to CoreLogic’s national property market update for July 2017
This month we’ll be providing an overview of the housing market conditions over the June quarter as well as examining what factors are likely to be contributing to a slowdown in the pace of capital gains seen over the most recent three months of data.
CoreLogic reported that dwelling values across the combined capital cities rose by 0.8 percent over the June quarter, which was the lowest quarter on quarter growth rate since December 2015. To put the week of performance into context, dwelling values were three and a half percent higher over the March quarter, highlighting a softening in the trend rate of growth over the three months ending March.
The slowdown was mostly affected by a softer result across the Sydney housing market where the quarter on quarter pace of capital gains has shifted from five percent in March down to 0.8 percent in June. The result in Melbourne was more resilient, with a quarterly pace of capital gains easing from 4.2 percent in March back to 1.5 percent over the June quarter.
Outside of Sydney and Melbourne, housing market conditions remain diverse. Brisbane recorded the third highest quarterly pace of capital gains with dwelling values half a percent higher over the June quarter. Brisbane ‘s growth is entirely attributable to a 0.8 percent rise in house values which offset a 2.4 percent fall in unit values over the quarter. Dwelling value stood lower across the remaining capital cities except in Perth, which posted virtually flat growth conditions at 0.1 percent over the June quarter.
Auction results have shown a similar easing over the June quarter with clearance rates trending lower from around 80 percent over the March quarter, through to the low 70 percent range in June.
In fact, the last three quarters of June has seen the Sydney clearance rate fall below 70%, while Melbourne’s auction clearance rates hold around the low 70 percent range.
Rental growth has been rising
While the pace of capital gains are slowing, rental growth has been rising, albeit from a low base. Capital city rents pushed 2 percent higher over the past 12 months. A stark turnaround from the end of 2016 when rental growth was flat.
The upswing in rental growth is mostly noticeable in Canberra and Hobart, where rents are rising respectively at 8.4 percent and 6.2 percent per annum.
However, Sydney and Melbourne rental markets have also seen a turnaround in what was previously a sluggish rental market. Rents in both cities are 4.5 percent and 4.1 percent higher over the past 12 months.
The growth in rents can be attributed to the ongoing significant rate of net migration into New South Wales and into Victoria, along with a lack of purchasing activity from owner occupiers first home buyers.
Housing market is transitioning
Overall, core logics June data indicates that the housing market is transitioning. With the rate of capital gains moderating across what’s been the hottest markets, while other cities continue to offer up a diverse performance.
Sydney and Melbourne dwelling values are now five years into one of the strongest growth phases on record. Sydney’s dwelling values have surged 79% higher since values started rising in June of 2012 and Melbourne dwelling values are 60% higher over the same time frame.
Prospective homebuyers and regulators are likely to welcome a controlled slowdown in these markets.
The slowing growth conditions can’t be tied to just one particular factor. The reduction in growth rates is due to a variety of factors including the recently announced macro potential changes from APRA, higher mortgage rates, particularly for investors – worsening affordability and a general reduction in consumer confidence. We’re yet to see the full effects of the APRA decision to limit interest only lending to 30% of new originations.
There is some way to go before lenders meet this new lending speed limit and it’s likely the mortgage rates will rise further despite a stable cash rate setting from the Reserve Bank. Discounting variable mortgage rates for investors based on data to the end of May are already 35 basis points higher than the recent 2016 low points.
With debt levels high and rental yields generally low it’s likely that investors will continue to be further disincentivized by higher mortgage rates and by stricter credit policies.
Lending to investors has been easing since December last year
The latest data from the Reserve Bank showed that housing credit growth for investment purposes has been easing since December which is well before the latest APRA intervention.
If mortgage rates continue to move higher, as we expect they will, we’re likely to see a further slowdown in investment activity.
The latest results from the Australian Bureau of Statistics indicate that investors comprised about 47% of new mortgage originations, which is the lowest proportion since October last year, but still substantially higher than the long-run average, which is roughly about one third.
As investment disincentives rise, first homebuyer incentives will kick in and it’s likely that investors will comprise a progressively smaller component of the housing market of the remainder of 2017.
The slowdown investor numbers is likely to impact the Sydney housing market more than others simply because investors comprise a much larger proportion of the marketplace than other regions.
The latest ABS Housing Finance data indicates that investors still comprise 55 percent a mortgage demand across New South Wales.
Potentially we may see investment demand deflect to other markets where rental yields are higher and capital gains are earlier in the growth cycle.
With the marketplace evolving so rapidly we recommend that you stay up-to-date on all the latest housing market research at www.corelogic.com.au