​What’s ahead for housing?

by External10 Jan 2014
As the year draws to a close, RP Data’s Cameron Kusher takes a look at where the housing market stands and where it’s heading

According to the RP Data-Rismark Home Value Index results for October 2013, capital city home values increased by 1.3% over the month, following on from a 1.6% monthly increase in September. Although the growth in home values was strong overall, it was largely attributable to value increases in the three largest housing markets (Sydney, Melbourne and Brisbane), along with Adelaide and Darwin. All other capital cities recorded lower values over the month. Over the three months to October 2013, combined capital city home values have increased by 3.4%.

As always, capital cities are experiencing a broad range of capital growth performances. Recent growth in Sydney and Melbourne values has been significantly stronger than in the other capital cities. Value growth in Brisbane and Adelaide has picked up over the past three months, whereas value growth appears to be stalling in markets such as Perth, Darwin and Canberra. The Hobart market continues to show no sign of any recovery from a values perspective; however, there has been some improvement in transaction numbers.

Combined capital city home values have increased by 7.9% over the past year, the fastest annual rate of value growth since October 2010. Home values are generally increasing across the individual capital cities, with Hobart (-2.9%) and Darwin (-0.1%) the exceptions over the past 12 months. Annual value growth has been strongest in Sydney (11.6%), Melbourne (7.8%) and Perth (6.9%). Elsewhere, annual value increases have been more moderate in Brisbane (3.4%) and Adelaide (1.9%), although the rate of value growth is accelerating while it is slowing in Canberra (3.5%).

Capital city house values have increased by 8.2% over the past year compared to 5.9% growth in unit values. Adelaide and Darwin are the only capital cities in which value growth for units has outstripped value growth for houses.

Home values, at least at a combined capital city level, have now passed their previous record high levels. The combined capital cities index previously peaked in October 2010 and fell by a total of -7.7% based on the RP Data-Rismark daily index. Home values have now risen by 10.2% since the recent trough and today sit 2% higher than their October 2010 peak. Although values are broadly increasing, the rate of value escalation to date is well below that of the same period during the 2001, 2007 and 2009 market growth phases. Across individual capital cities, home values are 9.1% higher than their previous peak in Sydney but remain lower across all other capital cities. On a city-by-city basis, the decline in values from their previous peaks are recorded as -0.8% in Melbourne, -8.4% in Brisbane, -3.9% in Adelaide, -0.6% in Perth, -15.2% in Hobart, -9.5% in Darwin and -1.1% in Canberra.

Sales activity has continued to increase across the country, with both house and unit sales volumes currently above the five-year average levels. RP Data estimates that over the three months to August 2013 there were 87,948 houses and 33,014 units sold. Based on these estimates, house sales are currently 18.3% higher than they were at the same time last year and unit sales are 15.8% higher. At the capital city level, sales over the past three months have risen across each city compared to the same three-month period in 2012. The greatest increases have been recorded in Melbourne (26.9%), Sydney (23.2%), Brisbane (22.6%) and Darwin (16.7%).

On the other hand, the rise in sales volumes has been more moderate in Canberra (3.0%), Perth (8.9%), Adelaide (10.6%) and Hobart (15.0%).

Sellers continue to enjoy increasing levels of empowerment when looking to bring their properties to the market. Sales volumes are clearly rising while the number of properties listed for sale is lower than at the same time last year. We are also seeing reduced levels of discounting by vendors in the market, which is contributing to a faster rate of sale. Across the combined capital cities, the level of discounting by vendors has reduced from 6.9% last year to 5.7% currently. This has resulted in homes selling faster, with the number of days it typically takes to sell reducing to 44 days from 56 days a year ago.

The number of newly advertised capital city properties listed for sale has been trending higher since the middle of August and is now 4.3% higher than a year ago. The total number of listings has also risen recently; however, total listings are 12% lower than they were a year ago. Total property listings are lower than a year ago in all capital cities except for Perth and Darwin.

Rental growth across the capital cities is being significantly outpaced by the growth in home values; as a result, rental yields are easing. Over the 12 months to October 2013, capital city rental rates have increased by 3% for houses and 2.8% for units, well below the five-year average annual rates of increase of 4.3% for houses and units. As sales volumes have increased, it is clear that rental pressures in the market are abating. Across individual cities, Perth and Darwin continue to record the strongest annual rate of rental growth; however, both have recorded a significant slowdown in rental growth recently. Over the three months to October 2013, rental rates have fallen in Melbourne, Adelaide, Perth, Hobart and Canberra.

The other aspect of the slowing of rental growth is the impact on rental yields. In October 2012, capital city gross rental yields were recorded at 4.2% for houses and 4.9% for units. Gross rental yields have eased over the past year to 4% for houses and 4.7% for units. With growth in home values much stronger than rental growth, it is reasonable to expect a further deterioration of rental yields over the coming months.

Economic data has been mixed over the past month; however, the trend in most economic indicators is quite positive.

As at the end of October 2013, the S&P/ASX 200 share market index rose by 4% over the month and was 20.1% higher over the year. The index has now reached its highest end-of-month reading since May 2008.

Most other indicators are also trending in the right direction. The exceptions include the extremely low number of first home buyers active in the housing market currently; the slowly rising unemployment rate, which is tipped to peak at 6.25% next year; and lower commodity prices (albeit they are significantly higher than historic levels). Across the other key economic data there is monthly and quarterly volatility; however, they are mostly heading in a positive direction.

Looking forward, the likelihood of the Reserve Bank cutting rates further seems to have eased with the more positive economic data. Most economists have now pushed back the timing of their predicted future rate cuts and some are now forecasting that the next movement will be an increase. The housing market is clearly responding in quite a positive manner to the lower rates and we are also seeing a response in dwelling approvals, which are now above their long-term average. A pick-up in dwelling construction is vital; the RBA has stated previously that a pick-up in housing construction is more vital than resurgence in the growth in home values.

As always, there is likely to be a continued variance in performances from city to city and region to region. Much of the growth over the year has occurred in Sydney, Melbourne and Perth, with growth in the Perth market appearing to slow more recently while in the two largest cities it seems to be continuing.

Over the last quarter there has also been a noticeable pick-up in value growth across the Brisbane housing market. Elsewhere, growth in home values over the past year has been moderate. As value growth and sales volumes have picked up, rental growth has slowed, which has already begun to result in yield deterioration, and this may in turn act as a disincentive to such high levels of investment activity.

Perth and Darwin appear to have been impacted by slowing investment in the resources sector, and this may further impact on housing demand; we are already seeing slowing rates of rental growth in both cities.

Although Sydney and Melbourne are continuing to see strong levels of home value growth, the best opportunities for investors have now passed, with values higher and rental returns diminishing. RP Data anticipates that affordability constraints will start to impact on value growth in these cities over the coming months; additionally, low rental yields in Melbourne and Sydney are likely to see a deflection of investor interest to higher-yielding markets.

Brisbane will likely see an acceleration in value growth, due to the fact that it has had a much longer correction phase than most other capital cities and may be lagging the recovery currently occurring in the nation’s two largest capital cities. Affordability in Brisbane is much healthier, as are gross rental yields. A similar recovery may also become apparent over the coming months in the Adelaide housing market.

Despite the signs that the housing and construction sector is picking up as mining investment slows, this does not mean that the economic changeover will be without its challenges. Globally, the US economy appears to be picking up and the Chinese economy seems to be experiencing a soft landing in terms of its moderation in economic growth. The national budget has recently seen an additional $33bn worth of revenue write-downs. Treasury is now forecasting that the unemployment rate will peak at 6.25% and has cut its economic growth forecast for this year from 2.75% to 2.5%. The anticipated jump in the unemployment rate is a potential risk for the housing market; if we reach 6.25% unemployment, this would be the highest rate since September 2002. If homeowners start to suffer widespread job losses or potential buyers become concerned about job security, this will potentially result in an increase in arrears rates and likely dampen housing market activity. And of course, if interest rates were to increase, this could extinguish some of the current housing market exuberance.