The national housing market in Australia has continued to show growth over the past quarter with capital city home values increasing by a further 2.7% according to the latest data.
The increase in prices has taken the total value of residential property nationally to $6.7 trillion at the end of October 2016, according to the home value index from real estate firm Corelogic.
But the report warns that after almost four and a half years of growth, affordability is becoming stretched in cities such as Sydney and Melbourne. The two cities are also seeing strong population growth so demand for homes is not going to weaken and buyers are finding affordability an issue.
The annual rate of value growth has been recorded at 7.5% to October 2016 and although that is a lower rate of growth than the 10.1% a year earlier, it has trended higher from a recent low of 6.1% in July 2016 as housing market conditions have accelerated over the second half of the year in Sydney, Melbourne and Canberra.
Across the individual capital cities, the market performance has been quite diverse. Values have risen by as much as 10.6% over the past year in Sydney and fallen by as much as 3.8% in Darwin. Sydney and Melbourne have consistently recorded superior value growth over recent years to that of the other capital cities.
‘The current growth phase for capital city home values commenced in June 2012, almost four and a half years ago, and since that time capital city home values have increased by 42.%. To put the geographic differences in growth into perspective, over the current growth phase Sydney home values are 65.9% higher and Melbourne values are up 48.6%, the capital city with the third highest rate of growth was Brisbane where values have increased by a much more modest 19.0% over the period,’ said Tim Lawless, head or research and analytics at CoreLogic.
He explained that the housing market is broadly continuing to see values rise due to a combination of factors but chief amongst these are low interest rates, increasing demand and strong investment returns largely fuelled by capital growth rather than rental returns.
‘With interest rates forecast to remain low and demand not showing signs of waning it seems likely that values will continue to climb, the pace of this growth remains the big question mark,’ he added.
The report also points out that the rise in home values and low cost of borrowing has been accompanied by a substantial uplift in dwelling construction. Although detached house construction has increased, the major feature has been a substantial uplift in construction of units to historic high levels.
‘Although official data is patchy and only available once a year, anecdotal evidence suggests that many of these units under construction have been purchased by offshore investors. The situation now stands that the pipeline of units under construction and approved but not yet commenced are at close to record highs with many set for completion over the next few years,’ said Lawless.
‘We are already seeing the value of units increase at a lower rate than houses and the record supply could create some issues for this market over the coming years, particularly for undifferentiated unit stock that is located in areas with a significant supply pipeline and targeted primarily towards the investment market,’ he pointed out.
One area where the impact of increased housing supply is already being felt is the rental market. The combined capital cities are currently experiencing the weakest rental market conditions on record, according to the report.
Lawless also pointed out that the last Census showed that units were more than two times as likely as houses to be rented. ‘A proportion of all these units under construction will go into short term accommodation, some will be owner occupied and some will be left vacant however, if history is a guide many of these properties will enter the rental market. Subsequently we would expect ongoing weakness in the rental market as unit supply increases,’ he warned.
He also warned that after almost four and a half years of growth, affordability is becoming stretched in both Sydney and Melbourne. ‘Although, both of these cities are the centrepieces of the two strongest economic states which are also experiencing strong levels of migration and population growth which are likely to continue to support housing demand,’ said Lawless.
‘The relative weakness of the remaining states and territories continues to limit the strength of the capital city housing markets. More recently the Australian Capital Territory’s economy has been improving and this has accompanied an uptick in value growth. Meanwhile, interstate migration into Queensland and Tasmania has accelerated which is likely to create increasing demand for home,’ he added.