The figures from CoreLogic RP Data reveal that the growth has gained momentum as the year has progressed and the firm’s head of research, Tim Lawless, believes interest rates cuts in February and May have contributed in pushing capital gains higher.
‘Growth conditions had been moderating from April last year through to the end of January 2015. With the RBA cutting the cash rate in February, there was an instant buyer reaction across the Sydney and Melbourne housing markets where auction clearance rates surged back to levels not seen since 2009, capital gains once again accelerated,’ he explained.
He pointed out that Sydney and Melbourne homes are selling in record time, some 26 days and 32 days respectively. But growth is not even. While Sydney and Melbourne have seen dwelling values increase by 16.2% and 10.2% over the financial year respectively, every other capital city has seen growth of less than 5% and values are down over the year in Darwin by 2.9% and Perth by 0.9%.
According to Lawless, the current housing growth cycle clearly highlights a divergence in capital gains across the capital cities. Since values started rising in May 2012, Sydney homes have seen a 43.1% surge in values and Melbourne values are up by 25.9%.
Despite softer market conditions in Perth, property values are currently up 12.8%, the third highest growth rate across the capitals. Simultaneously, Brisbane's property market has shown the fourth highest rate of growth at 12.4% followed by Adelaide at 10.4%, Hobart at 9.6%, Darwin at 8.9% and Canberra at 8.8%.
‘The three tiers of housing market performance can be best explained by economic and demographic factors where it's no coincidence that New South Wales and Victoria are recording the strongest economic conditions coupled with the strongest rates of migration which is fuelling housing demand. These states are more sheltered from the mining sector downturn and have benefited from the strong multiplier effect of housing construction as well as a vibrant financial services sector,’ said Lawless.
‘The Perth and Darwin markets are weakening in line with the downturn in the resources sector and an associated weakening in infrastructure investment and a marked slowdown in migration. Brisbane, Adelaide, Canberra and Hobart are seeing softer economic conditions and population growth compared with Sydney and Melbourne, however housing markets have shown some level of growth over the year,’ he added.
Looking at the performance of detached housing versus apartments over the financial year, houses are clearly outperforming units in the capital gains stakes. Over the financial year, house values were 10.4% higher across the combined capitals index while unit values increased by a much lower 5.6%.
The same trend where houses are showing a higher capital gain than units is evident across each of the capital cities except Hobart and Darwin and detached housing is outperforming apartments with this most evident in Melbourne. Indeed, Melbourne house values have shown a strong 11.2% capital gain over the financial year while apartment values are up by only 2.4%.
Gross rental yields drifted another notch lower in June due to dwelling values rising at a faster pace than weekly rents. Currently, the typical gross yield for a capital city house is recorded at 3.5% which is equivalent to the record low last recorded in 2007. The average gross yield on a capital city unit also fell over the month to reach 4.4%, the lowest gross apartment yield since 2010 and not far off the all-time low of 4.3% recorded in 2007.
‘It looks likely that the pace of capital gains will remain higher than rental growth which will push rental yields even lower over the coming months. Melbourne continues to hold the unfortunate title of the lowest yielding capital city, but if current trends continue, it won’t be long before Sydney overtakes Melbourne due to the substantially higher rate of capital gain in the face of comparatively low rental appreciation,’ Lawless explained.
Brisbane is now recording the highest gross rental yield for apartments, at 5.4%, and the only capital city where gross rental yields have improved over the year has been Hobart which is now starting to rival Darwin as the highest yielding capital city for houses.
Looking forward to the next financial year, Lawless said it is difficult to imagine Sydney maintaining such a rapid pace of capital gains. ‘Not only is affordability becoming a challenge for many sectors of the market, but yields are substantially compressed, rents are hardly moving and investors are facing tighter financing conditions from lenders,’ he pointed out.
‘In the absence of a trigger event, such as a sharp rise in the jobless rate, higher interest rates or an external shock, it is unlikely we will experience a significant correction in dwelling values. However, the longer this run of growth continues across our largest capital cities, the more susceptible the housing market becomes to changes in the economy or broadly across household finance,’ he added.
