The national property market continues to lose value momentum from its peak rate of growth a year ago, driven in large part by sustained falls in Sydney house prices.
Dwelling values were flat in October across the combined capitals, according to CoreLogic, with only Melbourne, Brisbane and Hobart posting any growth. Sydney's price drop of 0.5% for the month meant it joined Perth and Darwin as the only capitals to post both monthly and quarterly falls.
Hobart passed Melbourne to be the strongest-performing capital for the year, with annual growth of 12.7%.
CoreLogic head of research, Tim Lawless, argued that "seeing Sydney listed alongside Darwin and Perth, where dwelling values have been falling since 2014, is a significant turn of events". He again attributed the broad slowdown in capital gains across most capitals to "tighter credit policies which have fundamentally changed the landscape for borrowers".
Houses vs apartments
The Harbour City's apartment market is proving to be more resilient than its house market, however. Sydney unit prices showed slight growth of 0.4% over the three months to 31 October, compared with a 1% fall in house prices over the same period.
This growth is in contrast to what Lawless described as "the underperformance of the unit sector in [most other capitals]", which "likely relates to higher supply levels relative to demand and less challenging affordability constraints which is supporting demand across the detached housing sector".
Significantly, unit prices in Brisbane have seen an annual fall of 1.5%, the only eastern capital to go backwards over the year for apartments.
Yields still struggling
Darwin apartment prices have fallen by more than 6% over 2017 as the top end draws ever closer to Adelaide to becoming the nation's most affordable mainland capital. But value losses appear to be boding well for rental returns there, with Darwin now offering the highest gross rental yields for both houses and units by a wide margin.
Outside of Darwin, however, yields remain at or close to record lows in most capitals, though Sydney has also shown a "subtle improvement" according to Lawless.
"If the Sydney market continues to see values slip lower while rents gradually rise, yields will repair, however a recovery in rental returns is likely to be slow process," he said.
Outside the capitals
Regional towns and cities appear to be the beneficiaries of what have been until recently tight affordability constraints in Melbourne and Sydney. Regional NSW, for example, is now showing a stronger growth trend than Sydney, with areas such as Newcastle (up 14.6% over the year) and the Southern Highlands (up 13.6%) performing particularly well.
"Growth has rippled away from the Sydney metro area as affordability challenges constrain demand," said Lawless. "Buyers are attracted to the lower price points and lifestyle opportunities of the adjacent areas where commuting is still an option.”
Will interest rates rise?
CommSec Chief Economist, Craig James, argued "the Reserve Bank has no need to lift or cut rates as yet" since "home prices are growing at a slower pace in many markets, but back to more sustainable levels".
Lawless also agreed that "mortgage rates aren't likely to rise materially over the foreseeable future. With household debt at record highs, higher mortgage rates would test already stretched household balance sheets".
Looking ahead, James predicted that "home affordability will start to improve again in major cities".