State of the cities

Over the 2012/13 financial year the national housing market was reinvigorated, mainly due to the increasingly low mortgage rate environment. Over this period, combined capital city home values increased by 3.8% compared to a -3.6% fall in values over the previous financial year. Although values are once again broadly rising, it doesn’t mean there aren’t future headwinds for the market.

 

The housing market has responded quite positively, to date, to the low mortgage rate environment; whether the current rising values are sustainable remains to be seen. Although mortgage rates are low, the unemployment rate is edging higher as job creation slows, households continue to save at levels not seen since the late 1980s, credit growth is at close to record low levels, and economic growth is below trend. All of these factors combined – along with the declining terms of trade and a domestic economy that is transitioning away from a mining investment boom – indicate that the current resurgent conditions aren’t necessarily a safe bet.

 

As always, the performance of the capital city housing market has been varied over the past year. Hobart was the only capital city to record a fall in values (-1.8%), with value growth at moderate levels in Adelaide (0.2%), Brisbane (0.6%) and Canberra (1.1%). On the other hand, growth in residential property values has been comparatively strong and has beaten inflation in Darwin (6.1%), Perth (6.0%), Sydney (5.6%) and Melbourne (3.4%). The sustainability of the recent recovery also appears to vary on a city-by-city basis.

 

SYDNEY

Home values have increased by 5.6% over the past year. However, values have increased at a miserly average annual rate of just 2.5% over the past 10 years. With low value growth, limited new housing construction and ongoing population growth, we would expect value growth to continue in Sydney.

 

MELBOURNE

The Reserve Bank felt it necessary to warn about the prospects of the city’s inner-city unit and fringe housing market earlier this year. Outside of value corrections in 2008 and 2011/12, Melbourne home values have continued to increase since 1996. With fairly sufficient new construction and average annual value growth of 8.4% over the past 15 years, the Melbourne markets current growth trajectory looks less sustainable over the coming years.

 

CAPITAL CITY	MONTHLY CHANGE	QUARTERLY CHANGE	YEARLY CHANGE
Sydney	2%	3.7%	6.5%
Melbourne	2.3%	2.4%	4.3%
Brisbane	0.1%	-0.7%	0.8%
Adelaide	-1.5%	-3.1%	1.1%
Perth	1.6%	4.4%	8.3%
Hobart	0.9%	2%	-0.4%
Darwin	2%	1.4%	4.1%
Canberra	2.5%	1.4%	4.1%
All capitals	1.6%	2.3%	4.9%

Source: RP Data

 

 

BRISBANE

Value growth over the past year has been limited, at just 0.6%. In fact, Brisbane home values currently sit at a similar level to what they were at in late 2007. The pricing gap between Brisbane and the southern capitals continues to grow, while new supply remains insufficient, suggesting the housing market’s recovery may gather momentum over the coming year.

 

ADELAIDE

The market recovery has been moderate to date, with values up just 0.2% over the past year. A low labour force participation rate and a slowing mining and manufacturing sector will probably contain any breakout in value growth over the coming year.

 

PERTH

The Perth housing market has been a significant benefactor of the mining boom and associated population growth. Although until recently there was very little growth in home values, rental growth was booming. As value growth has picked up over the past year, we have seen rental growth stall over the past six months. With the mining sector slowing, this may adversely affect the Perth housing market, which may in turn create headwinds for Perth home values.

 

DARWIN

Home value growth has led all capital cities over the past year at 6.1%, while the city enjoys the highest gross rental yields among all capital cities. Despite the surging values, as the resources sector has slowed there has been a slowdown in rental growth, and home values have actually fallen by -0.4% in 2013. The recent slowdown likely foreshadows further slowing of market conditions.

 

CANBERRA

Values across the nation’s capital have increased by just 1.1% over the 2012/13 financial year and rental rates have fallen. With the potential for job cuts after the federal election in the public sector, this will undoubtedly impact on demand for Canberra housing and therefore potentially lead to softer housing market conditions.

 

Overall, low mortgage rates have facilitated the growth in home values, and most indicators suggest that interest rates will remain at similar or lower levels for at least the next 18 months. With economic growth below trend, a slowing Chinese economy, both political parties focusing on returning to surpluses, and unemployment tipped to rise, the housing market isn’t likely to respond to the lower mortgage rate environment in the way it did back in 2009. What is more likely is that a measured rate of recovery will continue, with dwelling values broadly rising in line with wages.