Sydney again recorded the largest increase at 13.7% year on year followed by Melbourne at 7.4% and Brisbane at 5.9%, according to the CoreLogic RP Index.
In contrast, dwelling values have increased by less than 4% in every other capital city over the year. The data also shows that since the beginning of the growth cycle in June 2012, dwelling values have moved 22.6% higher across the combined capital cities.
According to Tim Lawless, head of research, this demonstrates the heat emanating from the Sydney market with values up 34.8% cumulatively over the cycle to date across Australia’s largest capital city.
Lawless pointed out the latest month on month results show a moderation in the rate of dwelling value growth compared with the December and January figures. The monthly rate of growth slowed from 1.3% in January and 0.9% in December, however the growth trend remains strong, particularly in Sydney and Melbourne.
‘The slower rate of capital gain in February may come as a surprise to some who were expecting lower mortgage rates to instantly propel the pace of home value growth higher. We are already seeing the effect of lower mortgage rates, with auction clearance rates surging to the highest levels we have seen since 2009 and valuation activity reaching new record highs based on daily averages over the second half of February,’ said Lawless.
‘Despite the flurry of activity, it will likely take some time to see this flow through to a higher rate of capital gain. We might not see the lower interest rate environment stimulate the housing market as much as it has in the past,’ he explained.
‘Weaker jobs growth, higher unemployment, declining affordability, low rental yields and political uncertainty are all factors that could dent consumer confidence and provide some counter balance to the rate cuts and quell any additional market exuberance,’ he added.
The report also says that there is evidence of compressed rental yields continuing across each of the capital city markets. A year ago the gross rental yield for a capital city dwelling was averaging 4.3% but by the end of February the typical gross yield has been eroded down to just 3.7%, due largely to the consistent high rate of dwelling value growth relative to rental growth.
According to Lawless, over the current growth cycle to date, capital city dwelling values have risen at more than three times the pace of weekly rents. ‘The bi-product of such strong capital gains and relatively weak rental growth is that rental yields are being forced lower and lower,’ he said.
In Melbourne, the yield profile is the lowest of any capital city with the typical Melbourne dwelling showing a gross yield of just 3.3%. Sydney isn’t far behind with a gross dwelling yield of 3.6%.
However, Lawless noted that if Sydney dwelling values continuing to outpace rents so quickly it take over Melbourne to show the lowest gross rental yields. Total returns in Sydney are approaching the 20% mark over the past 12 months, substantially outperforming other asset classes. Lawless explained that even though dwelling values aren’t rising as quickly in Brisbane, the total return is almost equal to Melbourne’s, at 10.9% in Brisbane compared with 11.1%, thanks to the healthier yield profile of the Brisbane market.
‘With housing market investment now roughly level with owner occupier demand, it is clear that investors, particularly in Sydney and Melbourne where investor activity is most prominent, are speculating that capital gains have further to go and are ignoring the low yield profile of these cities,’ said Lawless.
‘While this may be a successful strategy in the short term we would suggest a focus on both capital growth and rental return is a safer and more sound strategy overall,’ he added.
