Sydney soars ahead with strong price growth compared to other Australian cities

Home values in Australia’s capital cities increased by 1.4% in March with Sydney leading the way with strong growth of 3% while prices elsewhere were relatively flat, the latest index shows.

On a quarterly basis prices increased by 3% in the first three months of 2015, the CoreLogic RP Data Home Value Index also shows.

However, although value growth has started 2015 on a strong note, the annual rate of growth has moderated back to 7.4% which is the slowest annual growth rate since September 2013.

On top of the 3% monthly price rise, values in Sydney are up 5.8% on a quarterly basis and 13.9% on an annual basis. With stronger housing market conditions over the first three months of the year, annual home value growth across the Sydney market has rebounded after slowing to 12.4%, according to head of research Tim Lawless.

He pointed out that Sydney is the only housing market where dwelling value growth remains in double digits, with the next strongest performer, Melbourne, showing a much lower rate of annual capital gain at just 5.6%.

Each of the remaining capital cities have recorded an annual rate of growth which is less than 3% with values having declined across Perth, Darwin and Hobart over the year. The index data also shows that since home values began their current growth phase in June 2012, prices across the combined capital cities have increased by 24.3%.

‘Most of this growth is emanating from Sydney. Over the current growth phase, Sydney dwelling values have increased by 38.8% with Melbourne second strongest at 23.6%. On the other hand, total dwelling value growth over the current cycle has been less than 10% in Adelaide, Hobart and Canberra,’ said Lawless.

He also explained that while the overall quarterly rate of growth is strong it is important to note that it is lower than the 3.5% increase in home values over the first quarter of 2014.

While dwelling values continue to rise across most cities, weekly rents are failing to keep pace. Across the combined capital cities dwelling rents have risen by just 1.7% over the past year which is a stark contrast to the 7.4% capital gain in dwelling values over the same period.

Sydney is showing the highest increase in weekly rents over the year at 3.3% while Perth has shown the most substantial correction, with weekly rents down 4.1% over the past 12 months. The fact that dwelling values are moving higher at a much faster pace than rents is causing gross rental yields to consistently compress across each of the capital cities, the index report says.

Since the middle of 2013 the average gross rental yield across Australia’s combined capital cities has reduced from 4.3% to 3.6%. Gross rental yields are now approaching record lows in both Melbourne and Sydney at 3.3% and 3.6% respectively.

‘Despite the headwinds of softer labour markets, very low rental yields, increased oversight on lending conditions and heightened economic uncertainty, historically low mortgage rates appear to be adding further stimulus to the housing market, albeit that stimulus is largely being felt in Sydney,’ said Lawless.

‘Clearly the vast majority of growth in dwelling values can be attributed to a very strong Sydney market that is largely fuelled by investment demand. The interest from investors is understandable, with housing currently offering up strong capital gains,’ he explained.

He added that with the growth curve in Sydney now well advanced and rental yields approaching historically low levels, prospective investors may be wise to use some caution when considering their investment options.

And, although household income growth is minimal, Sydney’s housing market continues to reach new record highs, with values increasing over the past 35 months and experts to wonder how much longer the growth can persist.

‘When the Sydney housing market starts to lose momentum, there is some risk that recent investors could be left holding a very expensive but low yielding asset with a lower than expected rate of capital gain over the coming years. From there it will be interesting to see if they bide their time in the housing market or exit to other asset classes with a stronger return profile,’ Lawless concluded.