While headline growth rate remains positive, three capitals recorded a decline in values over the past three months with Melbourne falling -0.9%
National home values rose 0.5% in July, the 18th consecutive monthly increase in home values nationally – a figure on par with the 0.5% increase recorded in June. Following a -7.5% decline recorded between May 22 and Jan 23, the national HVI has gained 13.5% and values have consistently pushed to new record highs since November last year.
However, while the headline growth rate remains positive, it is clear momentum is leaving the cycle and conditions are becoming more diverse. Three capitals recorded a decline in values over the past three months. Melbourne led the decline with a -0.9% fall, alongside a -0.8% and -0.3% reduction in Hobart and Darwin values respectively. The rolling quarterly pace of growth has slowed markedly in Sydney to 1.1%, a fraction of the 5.0% quarterly gain recorded at the same time last year. These dynamics are weighing on growth in national home values, which are up 1.7% in the past three months compared to the 3.2% increase seen this time last year.
The mid-sized capitals are continuing to buck the slowing trend, with the quarterly pace of growth in Perth tracking at 6.2%, while growth in Adelaide accelerated to 5.0%, the fastest rolling quarterly pace of growth since May 2022. Brisbane values rose at a quarterly pace of 3.8%, though this is down from a 4.7% increase seen this time last year.
CoreLogic’s research director, Tim Lawless, said available supply is a key factor explaining the diverse outcomes in housing growth trends. “The number of homes for sale in Brisbane, Adelaide and Perth is more than 30% below average for this time of the year, while weaker markets like Melbourne and Hobart are recording advertised supply well above average levels,” Mr Lawless noted.
An erosion in borrowing capacity and affordability factors is skewing demand towards the lower price points of the market, with lower quartile values leading the growth trend across every capital city except Darwin and Canberra which are also the two most affordable capitals after adjusting for local incomes. At a combined capital city level, lower quartile dwelling values are up 3.3% over the past three months compared with a 0.8% increase in upper quartile values.
Growth in regional housing values is once again lagging the capitals, with a rolling quarterly rise of 1.3% across the combined regionals index compared with a 1.8% gain across the combined capitals. Mimicking the capitals growth pattern, regional Western Australia (4.7%), regional South Australia (3.2%) and regional Queensland (2.8%) led the rolling quarterly change. Regional Victoria was the only ‘rest of state’ area to record a decline in values over the three months ending July, with values falling -1.4%.
Units are now rising faster than houses across most of the capitals. The only exceptions over the past three months were Darwin and the ACT, where affordability pressures are less pressing and a history of higher supply levels across the medium to high density sector has been more apparent.
“Most cities now have a median house value that is at least 1.5 times higher than the median unit value. With stretched housing affordability, lower borrowing capacity and a lift in both investor and first home buyer activity, it’s not surprising to see the unit sector outperforming for a change,” Mr Lawless said.
CoreLogic’s hedonic rental index was only 0.1% higher in July, the smallest monthly rise since August 2020. The monthly change in rents was negative in Sydney and Brisbane (-0.1% in both cities and the first monthly decline since 2020) as well as Hobart (-0.3%).
A clear slowdown in the pace of rental growth across the unit sector has been the main drag on rental growth, especially in Sydney where the annual change in unit rents has dropped from 17.9% in May last year to 6.6%. Melbourne and Brisbane unit rents have also lost more than 8 percentage points in the annual growth rate.
The slowdown in unit sector rental growth is off a high base. Despite the slower rate of annual growth, Sydney unit rents still rose by 6.6% over the past 12 months, which is more than double the pre-COVID decade average (2.7% annual growth).
“The easing in rental growth aligns with the peak in net overseas migration in the first quarter of 2023. The large majority of overseas migrants, mostly students, arrive in Australia on temporary visas. Housing demand from overseas migration tends to favour inner city unit rental markets,” Mr Lawless said.
Growth in house rents is also easing in most cities, but again this is from a high base with the annual pace of rental growth remaining well above pre-COVID averages in most cities.
With value growth outpacing rental growth we could once again see some downwards pressure on gross rental yields. The spread between investor mortgage rates and gross rental yields has widened significantly since the commencement of the rate hiking cycle: in April 2022 there was only 1 basis point difference between national gross rental yields and variable mortgage rate for investors. Since then the spread has widened to 294 basis points in July, implying opportunities for positive cash flow have become increasingly scarce.
The underlying mismatch between housing supply and demand looks set to support housing prices through the second half of the year, however there does seem to be some rebalancing underway.
Real estate listings have been flowing onto the market at a pace slightly above average through autumn and winter, which has been testing the depth of buyer demand. At a macro level, demand has been deep enough to absorb the higher level of advertised supply, but pockets of weakness are emerging. Listings numbers are now well above average in Hobart and Melbourne and are normalising in Sydney. In the three months to July, CoreLogic estimates there were approximately 125,000 sales across Australia, a little higher than the 121,000 new ‘for sale’ listings added to the market in the same period. This suggests there were still more buyers than sellers in the market, but sales and listings are more finely balanced than the same period last year, when there were 123,000 sales against just 112,000 new listings.
Beyond the number of homes available to purchase, the supply of newly built homes remains insufficient relative to population growth. A further -6.5% drop in dwelling approvals through June highlights the challenges faced by the residential construction sector. Profit margins have been compressed, skilled trades are scarce and holding costs remain high.
“On the positive side, we are now seeing residential construction costs rising at the slowest annual pace in 22 years,” Mr Lawless said. “Although the cost to build isn’t reducing, the slower pace of growth should provide builders some confidence that project costs won’t blow out. Additionally, with established housing values rising almost three and half times faster than construction costs, profit margins should gradually repair.”
Investors are taking a larger share of demand. A key trend emerging from ABS lending indicator data is the upswing in lending for investment purposes. Nationally, the number of investor loans are up 24.8% on last year and the value of lending to investors has jumped 29.5% over the year to comprise 37.1% of mortgage demand. In WA, where home values have jumped 23.9% over the year, investor lending is up 53%, more than double the national average.
“Investor demand tends to seek out capital growth, so it’s no surprise to see such an upswing in markets like Western Australia and Queensland where values are rising rapidly and yields tend to be higher than the larger capitals,” Mr Lawless said.
“However, the share of investment demand is well above average at a time when rental yields are tracking substantially lower than mortgage rates, implying a rising number of investors are likely to be experiencing a cash flow loss, especially if they are highly leveraged.”
The outlook for the housing sector remains complicated. While constraints on new housing supply are likely to keep a floor under home prices and remain a feature of the market for some time yet, downside risks are growing.
Housing affordability is becoming more challenging in markets where values are rising faster than incomes. In March the national dwelling value to income ratio rose to 7.7 and is likely to be approaching record highs once the June quarter data is published next month. Similarly, the portion of household income required to service a new mortgage was already at record highs in March, and has likely risen further by now.
CoreLogic Australia