Capital growth took a breather in May, with capital city house prices dropping for the first time in six months. However, it is not expected to last long.
The pace of home value growth stalled in May with dwelling values down 0.9% over the month, according to the CoreLogic RP Data Hedonic Home Value Index. This is the first month-on-month fall since November last year. However, the head of research at CoreLogic RP Data, Tim Lawless says the weaker reading across the May results is likely to be short-lived.
“The negative May result is likely due to a natural correction from the previously strong month-on-month results. Added to this is the market stimulus due to lower interest rates, and a well-received federal budget in May – all of which are likely to keep momentum going in the market,” he said.
“Other market indicators are also pointing to stronger conditions for the Sydney and Melbourne housing markets with auction clearance rates remaining at or close-to record highs throughout May along with low advertised stock levels across the largest cities, particularly for Sydney.”
Over the year to May, capital city dwelling values have risen 9%, according to the index, up from 7.9% annual growth in the year to April. The May results also mark the three year anniversary for the current growth cycle, which commenced at the end of May 2012. Since that time, Lawless noted that capital city dwelling values have increased by 24.2%.
“While every capital city has seen some level of capital gain over the growth cycle to date, the past twelve months’ performance has been more diverse. Dwelling values are down by 2.0% in Darwin and 1.0% lower in Hobart, while Perth is narrowly avoiding an annual correction with dwelling values up by just 0.7% over the past year,” he said.
Meanwhile, lower interest rates coupled with high levels of investor interest have caused the annual rate of dwelling value growth across Sydney and Melbourne to surge over the last 12 months. House prices are up 15% in Sydney and 9% in Melbourne over the year to May.
However, with APRA now focused on reducing bank exposures to investor loans and consequently many of Australia’s banks recently announcing changes to their investment lending policies, Lawless says we are likely to see some cooling in the level of investment demand across the market.
“The extent to which this, as well as more focus on reducing the proportion of interest only loans and new mortgages with a high loan to valuation ratio, impacts on growth rates in Sydney and Melbourne is yet to be seen,” he said.
“However, with investors comprising 60% of new home loan commitments in New South Wales, a slowdown in investor numbers, together with heightened affordability challenges and a record number of new housing starts may conspire to slow the rate of capital gains from their currently frothy highs.”