Ben Anderson analyses the state of the Australian residential property sector.
The residential property market is Australia’s single largest and most valuable asset class, with a total estimated value of $5.2 trillion, and therefore it remains an extremely important component of the local economy.
Over the past year, gross domestic product was recorded at $1.53 trillion, indicating the total value of residential housing is significantly larger than the annual output of the Australian economy.
Sydney and Melbourne are leading the growth phenomenon, recording the strongest capital growth conditions of all capital cities so far in 2014.
Even though performance nationally has been strong across most capital cities, Sydney and Melbourne have been the only capital cities to have experienced double-digit growth over the past year.
According to RP Data, Sydney’s dwelling values increased by 27.2 per cent and Melbourne values by 19.5 per cent over the latest growth cycle. Sydney and Melbourne were also the strongest-performing cities during the 2009/10 growth cycle as well.
Since the beginning of 2009, we have seen values rise by a cumulative 50.1 per cent and 46.1 per cent in Sydney and Melbourne respectively. Looking at the other state capitals over the same time frame, Perth’s dwelling values are now 15 per cent higher, followed by Adelaide at 9.9 per cent and Brisbane at 5.3 per cent.
Hobart is the only city to experience negative growth (-1.5 per cent).
Considering the higher auction clearance rate results in recent months and the rapid rate of sale closures, combined with a low interest rate environment, it’s likely that dwelling values across most capital cities will rise over the next quarter.
We can therefore expect with the start of spring upon us that listing numbers will rise over the coming month as well, which will provide a real test for the housing market.
Consumer confidence is also moving in the right direction, which has contributed to the last few months of solid capital growth across most capital cities. As long as confidence remains strong, this should continue to add fuel to the exuberant buying and selling conditions the housing market has experienced during the winter period.
For most of 2014, property investors have been concentrating across the Sydney and Melbourne apartment markets where capital gains have been strong, but yields have been pushed very low. Rental yield historically tends to be healthier in smaller regions where capital growth tends to be present in more mature markets.
Auction clearance rates
Both Melbourne and Sydney’s property sales results in recent months continued to break records for volume, values and property investor involvement, setting the scene for a big result as the traditional spring season gets into full swing. As winter draws to a close, the number of auctions in the first week of spring was hot. As predicted, the first weekend in
September experienced a 30 per cent increase in the number of scheduled auctions. Six hundred and fifteen auctions were reported to the Real Estate Institute of NSW, with 480 selling and 129 passing in. The clearance rate was 79 per cent, compared to 80 per cent the previous week and 76 per cent the same week last year.
For NSW, a clearance rate of 77 per cent was recorded in the same weekend compared to 73 per cent the weekend before and 73 per cent this weekend last year. For Victoria, the Real Estate Institute of Victoria expected more than 2100 auctions in the two weekends before the AFL Grand Final. That would have surpassed last year’s 1800 auctions over the same weekends as vendors continue to favour auctions this year.
Sydney property investors dominated, with more than 60 per cent – the highest in a decade – attributed to those seeking income or capital growth from real estate growth, a figure that last year topped 15 per cent, according to RP Data.
An estimated $33 billion annual spend on property by foreign buyers is also having an impact on Sydney and Melbourne volumes, prices and the types of properties being put up for offer, according to analysis by UBS for the federal parliament’s inquiry into foreign investment in residential real estate.
The recent rain and blustery weather conditions in Sydney have not deterred buyers from attending auctions. In addition to higher returns, low interest rates and pent-up demand, there was also the added expectation that prices still have a way to go leading into the warmer months of 2014 up to Christmas.
Melbourne’s property market, with its robust clearance rates of nearly 80 per cent, is substantially higher than the same time last year despite more than 70 per cent more properties on offer compared to the same period a year ago. More than 40 per cent of current buyers are estimated to be investors.
Most other capital cities posted increased clearance rates. Brisbane was about 50 per cent, Adelaide 70 per cent, Canberra 56 per cent and Perth 27 per cent.
During 2013/14, there was a 90 per cent increase in Foreign Investment Review Board applications, which is useful for monitoring the scale of activity, but lacks detail on its impact on prices.
Capital cities
The median dwelling price of all combined capital cities is now around $520,000, with Sydney still the dominant influencer at $650,000. Sydney topped the chart yet again with a record high median house price of $740,000, making it increasingly difficult for first home buyers to pursue the property of their dreams in the most desired locations.
Melbourne’s change in dwelling values year on year is now in double digits, recording growth of 11.7 per cent, with the combined capital city average now sitting at 10.9 per cent growth year on year. Melbourne has also been the standout performing capital city for the quarter with 6.4 per cent growth compared to Sydney (5 per cent).
An increase in auction clearance and decrease in vacancy rates in Adelaide in recent months have also lead to a rise for the quarter in terms of dwelling values at 5.9 per cent, followed by Brisbane and Darwin (both rising 5.4 per cent). Even Hobart experienced steady growth for the quarter, recording a 2.8 per cent increase in value.
The increase in prices has contributed to the rise in the total value of residential dwellings to $5.2 trillion up to the June quarter 2014, an increase of almost half a trillion dollars since June 2013. As indicated earlier, the mean price of dwellings in Australia is now $520,000, an increase of more than $25,000 over the year. This represents more than twice the increase over the year to June 2013.