Capital city property prices down, but expected to be short lived blip

After an increase in values of 3.8% over the first four months of the year, prices in key Australian cities fell 0.9% in May, according to the latest residential index.

The CoreLogic RP Data Home Value Index recorded its first month on month fall since November last year and it comes at a time when values have been trending higher.

According to CoreLogic RP Data head of research, Tim Lawless, the growth has been driven by exceptionally strong housing market conditions in Sydney, and to a lesser extent in Melbourne and he expects May’s dip to be short lived.

‘Other market indicators are also pointing to stronger conditions for the Sydney and Melbourne housing markets with auction clearance rates remaining at or close-to record highs throughout May along with low advertised stock levels across the largest cities, particularly for Sydney,’ he said.

‘The negative May result is likely due to a natural correction from the previously strong month on month results. Added to this is the market stimulus due to lower interest rates, and a well-received federal budget in May, all of which are likely to keep momentum going in the market,’ Lawless explained.

The May indices results also marks the three year anniversary for the current growth cycle which commenced at the end of May 2012. Since that time, Lawless noted that capital city dwelling values have increased by 24.2% with Sydney values rising a significant 39.3% since values bottomed out in May 2012.

Melbourne dwelling values have seen the second highest rate of growth over the current cycle, increasing by 22.4% while in Darwin, values are 18.3% higher. Perth values are up 13.2% followed by Brisbane at 10.6%, Adelaide at 9.9%, Canberra at 8.3% and Hobart at 7.7%.

‘While every capital city has seen some level of capital gain over the growth cycle to date, the past 12 months’ performance has been more diverse. Dwelling values are down by 2% in Darwin and 1% lower in Hobart, while Perth is narrowly avoiding an annual correction with dwelling values up by just 0.7% over the past year,’ Lawless said.

At the same time, he added that lower interest rates and high levels of investor interest have fuelled a rebound in the annual rate of dwelling value growth across Sydney and Melbourne where dwelling values are 15% and 9% higher respectively over the past 12 months,’ he pointed out.

Both Sydney and Melbourne are also seeing their strongest economic conditions, coupled with the highest levels of new housing supply, particularly in the new apartment sector and according to Lawless the higher supply levels are likely to be a primary reason why unit values are rising at a much slower pace than house values in Sydney and Melbourne.

‘The pace of growth in unit values across Sydney is about half that being recorded across the detached housing sector, with house values up 16.4% over the year compared with an 8.8% rise in unit values,’ said Lawless.

In Melbourne, the situation is even more pronounced where growth in unit values has been less than half of what is being recorded across the detached housing sector. Melbourne house values are now 9.8% higher over the year compared with a 2.9% rise in unit values.

The index also shows that capital city rental yields remained steady over the month with the typical capital city rental dwelling attracting a gross yield of 3.7%, however yields have compressed substantially over the growth cycle to date.

‘Over the past three years, dwelling values have risen more than three times as fast as rents. Dwelling values are 24.2% higher across the combined capitals over the past three years while weekly rents have risen by only 7.2%. The net result is that gross rental yields have been compressed from 4.3% back in 2012 to the current average gross yield of 3.7% across the combined capital city index,’ Lawless said.

Rental yields are currently the lowest in Melbourne. A typical house is returning a gross yield of 3.2% while units are providing a higher gross yield, averaging 4.3%. Sydney follows closely behind, recording a gross yield of 3.4% for houses and 4.5% for units.

According to Lawless, if the current trend continues, it won’t be long before Sydney overtakes Melbourne as the lowest yielding city. Sydney yields have slipped by 41 basis points over the past 12 months compared with Melbourne where the gross rental yield is 22 basis points lower.

‘Clearly, investors are not bothered by the low rental yields that are currently available with housing finance data showing investors comprise a record 51 of the value of new home loan originations,’ Lawless said.

The CoreLogic RP Data accumulation index shows the total return in Sydney is now 19.4% per annum while Melbourne’s total return is 12.7% per annum. ‘When you consider these numbers and compare the total returns to other asset classes, it becomes clearer why investors are so attracted to property in Sydney and Melbourne despite the low yield that is available,’ Lawless explained.