Rate cut fuelling surge in Sydney house prices

by Julia Corderoy02 Apr 2015
Low mortgage rates have seen Sydney house prices surge over the first quarter of 2015.

Home values across Sydney rose 3% over March, 5.8% over the quarter and 13.9% over the year, according the CoreLogic RP Data Home Value Index. 

The stronger housing market conditions over the first three months of the year saw Sydney’s annual home value growth rebound after slowing to 12.4% in December 2014. 

Sydney is now the only housing market where dwelling value growth remains in double digits, with the next strongest performer, Melbourne, showing a much lower rate of annual capital gain at just 5.6%.

CoreLogic RP Data head of research Tim Lawless said since home values began their current growth phase in June 2012, dwelling values across the combined capital cities have increased by 24.3% - but most of the growth has emanated from Sydney.

“Over the current growth phase, Sydney dwelling values have increased by 38.8% with Melbourne second strongest at 23.6%. On the other hand, total dwelling value growth over the current cycle has been less than 10% in Adelaide, Hobart and Canberra.”

However, the surging Sydney market is likely to present a challenge for the Reserve Bank when they deliberate interest rate settings next week, according to Lawless.

“Despite the headwinds of softer labour markets, very low rental yields, increased oversight on lending conditions and heightened economic uncertainty, historically low mortgage rates appear to be adding further stimulus to the housing market, albeit that stimulus is largely being felt in Sydney,” he said.

With the data revealing that Sydney house price growth has been largely fuelled by investor demand, Lawless says investors should be cautious. 

“With the growth curve in Sydney now well advanced and rental yields approaching historically low levels, prospective investors may be wise to use some caution when considering their investment options.

“When the Sydney housing market starts to lose momentum, there is some risk that recent investors could be left holding a very expensive but low yielding asset with a lower than expected rate of capital gain over the coming years. From there it will be interesting to see if they bide their time in the housing market or exit to other asset classes with a stronger return profile.”