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Property prices soaring in south-eastern capitals

CoreLogic Home Value Index March 2017

The Sydney, Melbourne, Canberra and Hobart property markets are powering ahead with the strongest value growth seen in years – but how long will this continue?

Capital city house prices are increasing at their fastest annual rate in almost seven years, the latest CoreLogic analysis has found.

And no surprise, Sydney is leading the charge with annual value growth of almost 19%, its strongest rate since November 2002.

The NSW capital is one of four to post double-digit percentage value growth in its real estate markets over the past 12 months. Dwelling values are up almost 16% year-on-year (YoY) in Melbourne, 12.8% in Canberra and more than 10% in Hobart. And Sydney, Canberra and Hobart have all posted growth of more than 5% for the first quarter of 2017.

But despite the overall healthy figures across the combined capitals, strong performance in some cities continues to mask weaker performance in others. Perth and Darwin real estate markets have both fallen in value by more than 4% over the year, while Brisbane and Adelaide have posted similarly marginal YoY increases of 3.7% and 3.4% respectively.

Diverse conditions also remain evident across housing types. While Melbourne house prices have increased by more than 17% since March 2016, apartments have only gone up by 5.2% for the same period. Double-digit value growth for Canberra and Hobart houses has also been partly offset by marginal unit price growth in both capitals.

Citing Melbourne and Brisbane, CoreLogic head of research Tim Lawless noted the “disparity in growth rates is more significant in those cities where high new unit supply is more apparent.

“The weaker growth conditions within the unit markets’ sector reflect heightened levels of new supply across specific inner city precincts and also suggests that consumer confidence has been negatively affected by the warnings of a potential unit oversupply,” he said.

Will property investment hit the brakes?

Lawless also suggested some cooling may be on the cards for property investment activity, which he cited as one of two key drivers, along with lower mortgage interest rates, of the strong capital gains seen in the second half of 2016 in the major cities.

“Given the recent policy announcements from the Australian Prudential Regulation Authority (APRA) are aimed at dampening investment-related credit demand, we can expect lending conditions for investment purposes will tighten, particularly for investors with small deposits or those applying for an interest-only loan," he said. 

The new APRA rules will limit new interest-only lending to 30% of new lending and limit the number of loans with high loan-to-value ratios (LVR).

Lawless added: "Additionally, higher mortgage rates handed down by Australia’s major banks may contribute towards cooling some of the exuberance being seen in the largest capital city housing markets."

But CommBank economist Kristina Clifton argued that while "higher rates and tighter lending conditions will have some impact on housing activity at the margin... these measures won’t be enough to cool the market to the extent needed to allow the RBA to cut rates further to bring wages growth and inflation back to normal levels at a quicker pace". 

Lacklustre rental yields

The current low-inflation, low-income growth environment means rental growth is soft compared to the rate of capital gains. Consequently, gross rental yields have once again slipped to record lows for Sydney and Melbourne, which now offer yields of just 2.7% for their houses compared with yields of more than 5% for apartments in Brisbane, Canberra and Hobart.

According to CoreLogic, “low rental yields, higher mortgage rates and stricter lending policies around serviceability could create budgetary challenges for investors”.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.