Ben Anderson provides a snapshot of the current status of the domestic residential property market.
Macroeconomic picture
From an economic perspective, like other developed countries, Australia is poised to face a period of flat growth. Taking into consideration that consumer sentiment figures are near parity (100.7), higher than expected unemployment (6.4 per cent, the highest since 2002) and slowing inflation in the December quarter (0.2 per cent versus 0.5 per cent quarter-on-quarter and 1.7 per cent versus 2.3 per cent year-on-year), the Reserve Bank of Australia (RBA) responded in February by cutting the cash rate from 2.5 per cent to 2.25 per cent, the lowest on record. The RBA reduced its forecast average expansion for the year to between 1.75 per cent and 2.75 per cent from between 2 per cent and 3 per cent in November, with market observers expecting rates to be further cut in the coming months.
What implications does this have for housing price growth? We believe capital gain appreciation will continue over the remainder of 2015 as investors and first home buyers continue to take advantage of highly attractive borrowing rates.
Housing market dynamics
Record low interest rates led to increased levels of home sales and housing finance extended over the year; subsequently, dwelling approvals also increased over the same period.
Given this period of record low interest rates, investors have continued to increase their appetite for buying property, which is represented by the increase in housing finance figures. Housing finance is essentially the outstanding values of housing loan assets to individuals held by lenders. According to Australian Prudential Regulation Authority data, housing finance outstanding increased by 0.7 per cent from the previous month to $1.314 trillion in December 2014. Of that, around $856 billion was held by owner-occupiers, up 0.6 per cent from the previous month, while loans held by investors increased by 0.9 per cent to around $459 billion.
Not surprisingly, the increase in housing finance has led to people buying more homes and the Housing Industry Association survey of Australia’s largest volume builders showed new home sales increased by 4.9 per cent in the December quarter and the number of sales in 2014 was 14.4 per cent higher than in 2013. In December 2014, total seasonally adjusted new home sales fell by 1.9 per cent, reflecting a drop of 9.2 per cent in ‘multi-unit’ sales and a flat result for detached house sales.
The buoyant mood in the property sector was also reflected in the “ANZ Property Confidence Index Survey”, which remained high at 132. This survey gauges the property industry’s sentiments about market conditions by canvassing the views of 4123 respondents – including owners, developers, agents, managers, consultants and government – across all major industry sectors and regions.
Dwelling approvals followed a similar trend. While the seasonally adjusted estimate for total dwellings approved fell 3.3 per cent in December from 18,245, the highest level on record, it was still 8.8 per cent higher on a year-on-year basis.
We believe the investor demand driven by the low interest rate environment will continue to drive capital growth over the coming year.
Capital growth
All capital cities bar Darwin reported a rise in median house prices over the December quarter. According to Domain Group research, Sydney clearly remains the dominant force among capital city housing markets, with the median house price increasing sharply by 4.1 per cent over the quarter to a record high of $873,786. Sydney median unit prices also recorded strong growth – increasing by 2.9 per cent to $597,668.
Over 2014, Sydney’s median house price increased by 14.1 per cent, just below the 2013 result of 15.4 per cent. Sydney continues to experience the strongest market conditions since 2003 and we expect this to continue into 2015.
Melbourne and Adelaide median house and unit prices also experienced modest growth over 2014, with Perth registering negligible growth and Darwin and Hobart experiencing a reduction in median unit prices over the year.
Rental growth
Sydney and Hobart were standout performers in terms of rental growth on a quarterly and annual basis, while Perth, Canberra and Darwin all experienced declines over the same period.
Once again Sydney recorded robust growth in weekly house and unit rents both on an annual and quarterly basis, with the median asking rent for houses reaching a peak of $520 per week. Although Melbourne experienced an increase over the past year, there was a slight decline in weekly asking rents for units over the past quarter, while Brisbane weekly asking rents actually declined year on year.
Perth, Canberra and Darwin all experienced significant decreases in weekly asking rents for houses and units on an annual basis, while Hobart recorded increases both on a quarterly and annual basis.
We expect upward pressure on rents to continue where underlying demand continues to outstrip supply. However, there is an increasing pipeline of new units in Brisbane and Melbourne to satisfy this pent-up demand.
Rental yields
Gross rental yields declined across most capital cities on an annual basis with only Melbourne and Hobart units seeing increases in yields.
On an annual basis, both Sydney and Perth’s gross rental yields for houses and units fell significantly, while the remaining capital cities experienced modest decreases, barring Melbourne and Hobart, which actually experienced increased gross unit rental yields on an annual basis. However, gross yields rose in most capital cities for both houses and units over the quarter, showing that a possible improvement is coming.
Flattening capital growth of dwellings in all capital cities except Sydney and rising rents are putting a floor under gross yields, which had been declining due to recent strong price growth. Strong underlying demand is set to continue to outstrip supply and put upward pressure on rents. We believe this is set to continue through 2015, particularly in the robust Sydney market. However, according to Domain Group research, increasing supply of new units in Brisbane and Melbourne will continue to provide more choice for tenants slowing the rate in rental growth.
Vacancy rates
Rental demand continues to outstrip supply, with vacancy rates in most capitals cities remaining low and national vacancy rates at 2.2 per cent in January.
All capital cities recorded dwelling vacancy rates below 3 per cent, with Adelaide and Hobart having the lowest vacancy rates out of all of the capital cities.
Auction clearance rates
In the week ended 8 February 2015, Sydney notched a strong 82 per cent clearance rate from 402 auctions, while in Melbourne, the clearance rate was 67 per cent from 246 auctions.
Although the clearance rates for houses in Sydney and Melbourne were lower than those of the previous year, they are still indicative of strong housing demand.