Ben Anderson provides a snapshot of the domestic residential property market’s current situation.
The big economic news of the June quarter was the Reserve Bank of Australia (RBA) reducing the cash rate to an all-time low of 2 per cent, despite improving trends in household demand over the past six months and stronger growth in employment.
In its latest statement, the RBA put forward the view that simultaneous weakness in business capital expenditure in both the mining and non-mining sectors and public spending means the economy is likely to be operating with a degree of spare capacity for some time yet. The central bank has also forecast inflation to remain constant over the next one to two years, even with a lower exchange rate. Given this inflation outlook, the RBA decided to ease monetary policy to reinforce the recent encouraging trends in household demand.
What does this mean for property investors? As per our initial assessment at the beginning of the year, we expect capital appreciation to continue over the remainder of 2015 and into 2016 as investors and first homebuyers continue to take advantage of the most attractive borrowing rates in recent history.
Housing market dynamics
Given this period of record low interest rates, investors have continued to increase their appetite for buying property, which is represented by the rise in housing finance figures. Housing finance is essentially the outstanding value of housing loan assets to individuals held by lenders. On a seasonally adjusted basis, housing finance figures increased by 3.5 per cent from the previous month to $31.6 billion in March.
Of that, $18.7 billion went to owner-occupiers, up 1.6 per cent from the previous month, while new lending to investors surged 6.4 per cent to $12.9 billion.
Unsurprisingly, the increase in housing finance has led to people buying more homes, and the Housing Institute of Australasia survey of Australia’s largest-volume builders showed that in the March quarter, total new home sales increased by 4.4 per cent to their highest level in over four years.
The buoyant mood in the property sector was also reflected in the ANZ Property Confidence Index Survey, which remained high at 131, but decreased from 132 in the previous month (a score of 100 denotes neutral sentiment). This survey gauges the property industry’s sentiment 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.
Echoing this sentiment, the seasonally adjusted estimate for total dwellings approved increased by 2.8 per cent in March on a month-on-month basis to 19,419, and 23.6 per cent on a year-on-year basis.
We believe investor demand driven by the low interest rate environment will continue to drive capital growth over the coming year.
Capital growth
According to Domain Group research, Sydney still remains the dominant force among capital city housing markets, with the median house price increasing sharply by 3.6 per cent over the March quarter to a record high of $914,056, with unit prices increasing by 1.2 per cent over the same time period to $609,800. Darwin was a standout performer in terms of unit capital growth, with the median unit price increasing 14.9 per cent quarter on quarter.
On a year-on-year basis, Sydney’s median house price increased by 16 per cent and median unit price increased by 9 per cent, far outpacing the capital growth experienced in other capital cities around the country, which was moderate or negative in comparison.
Rental growth
Hobart, Sydney and Melbourne took the lead in house median weekly rental growth, with rents growing 6.5 per cent, 4 per cent and 2.6 per cent respectively on a year-on-year basis. Perth and Darwin on the other hand experienced declines, with house median weekly asking rents declining by 7.1 per cent and 5.3 per cent on a weekly basis. On a quarter-on-quarter basis, median weekly asking rental growth was stagnant apart from Melbourne and Hobart, which experienced positive rental growth for both houses and units, and Darwin, where weekly asking rents for houses and units declined by 1.9 per cent and 3.7 per cent respectively.
Rental yields
On an annual basis, gross rental yields declined across all capital cities, barring Melbourne, Darwin and Hobart, where gross rental yields for units rose 0.3 per cent, 0.9 per cent and 5.9 per cent respectively on a year-on-year basis. However, on a quarter-on-quarter basis, gross rental unit yields rose across all capital cities, except Sydney, indicative of robust investor demand in the New South Wales capital.
Despite rental yields falling for both units and houses in most capital cities, yields are still higher than prevailing term deposit rates, and given the recent RBA rate cut, we expect downward pressure on yields to continue, especially in Sydney and Melbourne, for the rest of 2015.
Vacancy rates
According to SQM Research, rental demand continues to outstrip supply, with the national vacancy rate remaining low at 2.1 per cent in March.
All capital cities recorded dwelling vacancy rates below 3 per cent, except Darwin, with Adelaide and Hobart having the lowest vacancy rates out of all the capital cities.
Auction clearance rates
According to Australian Property Monitors data, in the week ended 9 May, Sydney notched a strong 89 per cent clearance rate from 559 auctions, while in Melbourne the clearance rate was 80 per cent from 765 reported auctions. Given the results for the auctions that took place the same time last year were 77.8 per cent and 72.9 per cent for Sydney and Melbourne respectively, this result is clearly indicative of a buoyant market with strong investor appetite. We expect high auction clearance rates to continue throughout 2015, due to record low interest rates and economists at the big four banks predicting no rise in interest rates over the next 18 months.