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The Experts

Tim Lawless
Expert
+ About Tim Lawless
Tim Lawless heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia.

Sydney investors see the first annual negative total returns since the GFC

Tuesday, May 29, 2018

With dwelling values substantially outpacing rents over the past six years, rental yields have been crushed to record lows in Sydney. Over the past five years, Sydney dwelling values have increased at four times the rate of rental increases, pushing yields to a recent record low of just 3.04% in July last year.  Since that time, Sydney dwelling values have been trending lower, falling by almost 5%.  With weekly rents only rising by half a percent since that time, yields remain only marginally higher relative to their record lows.

The average gross yield on a Sydney house is tracking at 2.96% and units are showing a slightly higher yield profile at 3.76%. Against this low yield profile, dwelling values are now falling on annual basis, down 3.4% over the 12 months ending April 2018.  The byproduct of low yields and negative annual movements in dwelling values is that Sydney’s total return has slipped into negative territory for the first time since the market was emerging from the Global Financial Crisis in early 2009.

Considering rental growth is sluggish across Sydney (dwelling rents were up only 1.2% over the past twelve months) and dwelling values are likely to trend lower over the coming months, I would expect the total return profile for Sydney to weaken further. 

While many investors tend to overlook weak yields, focusing more on the prospects for capital gains and relying on taxation policies to offset their cash flow loss, it’s surprising to see housing finance data indicating that investors still comprise slightly more than half of new mortgage demand across New South Wales. 

Investment across New South Wales peaked in early 2015. At that time, investors comprised almost 64% of new mortgage demand.  As macroprudential regulations impacted on credit availability and mortgage rates for investors, participation from this segment of the market has slowed but remains high from an historical perspective.  Over the long-term, investors have averaged 37.4% of new mortgage lending in New South Wales compared to their 50.2% currently.  Tighter credit policies for investors have been the primary driver of slowing Sydney’s exuberant housing market, however, considering the high concentration of investment based on the latest housing finance data, investors still seem to be attracted to the Sydney market despite its high buy in price, low yield profile and muted prospects for capital gains. 

There could be some further headwinds for investors as we approach a federal election sometime in the next twelve months.  It’s almost a certainty that debate around negative gearing policies and capital gains tax concessions will be front and centre.  With rental yields close to record lows in Sydney and Melbourne, and generally low across most capital cities, we could see investment confidence dented further during the campaign period and significantly reduced if these policies are changed. 

Considering investors still comprise roughly half of new mortgage demand in Sydney, and nationally investors account for 43% of new mortgage demand nationally, a further reduction in activity could prolong the housing market downturn.

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Keep a close eye on credit availability to spot housing market turning points

Tuesday, May 01, 2018

It’s intuitive that housing market conditions would have a close relationship with credit flows; when funds are flowing freely and rates are low, home buyers and investors step up their presence in the housing market and when credit is harder to come by or more expensive, things slow down.  Since 2015, things have become a bit more complex, and the correlation between dwelling value appreciation and housing credit has become tighter; especially when measured against investment credit.

Since macro prudential measures were announced and implemented by APRA, the trends in housing related credit have changed remarkably.  Soon after APRA announced the ten percent annual speed limit for investment lending in December 2014, investment housing finance commitments peaked at 55% of mortgage demand and investment credit growth moved through a cyclical peak rate of annual growth at 10.8%.  Around the same time, the quarterly rate of home value appreciation peaked in Sydney and Melbourne; the two cities where investment has been most concentrated.

As credit policies were tightened in response to the APRA limits, then loosened as lenders overachieved their APRA targets, the housing market responded virtually in concert.  Interest rate cuts in May and August of 2016 helped to support a rebound in the pace of capital gains, however as lenders came close to breaching the 10% limit, at least on a monthly annualised basis, credit once again tightened and the second round of macro prudential, announced in March 2017, saw credit availability restricted further. 

The result of changes in credit availability has been evident across most housing markets, but is very clear in Sydney and Melbourne; dwelling values started to track lower in Sydney from July last year and peaked in Melbourne in November last year.

More recently, there are some early signs that Sydney’s housing market is already achieving a soft landing, probably earlier than expected.  The monthly rate of decline has eased from 0.9% in December and January to reach 0.6% in February and 0.3% in March.  The easing rate of decline comes as investment credit flows have ticked up a notch and some lenders have announced a reduction in the mortgage rate premiums being paid by investors and interest only borrowers.

Whether the improvement in Sydney’s housing market is temporary or not will be largely dependent on credit policies.  It’s hard to imagine any lender would be aggressively ramping up their share of investment loans, despite the fact that APRA benchmarks have been so comprehensively achieved.  Investment credit growth is currently tracking at just 2.8% per annum and interest only originations were tracking at around 15% in December last year; roughly half the 30% APRA benchmark.  Despite over shooting the benchmarks, considering the Royal Commission is under way and there is a great deal of focus on lending practices, the likelihood is that investment related credit may step up a notch, but not likely enough to cause a sharp rebound in housing market conditions like what we saw through 2016.

 

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Is now the time to buy an inner city apartment?

Tuesday, March 20, 2018

Inner city apartment markets have been under the spotlight for all the wrong reasons over recent years, especially in Brisbane and Melbourne.  Despite all the negative attention, the residential unit sector looks to be moving through the worst of the supply pipeline.  

Here's why: Unit construction peaked across Victoria two years ago (March 2016) when almost 48,000 units were being built and the construction cycle peaked six months later in Queensland (Sep '16) when there was almost 32,300 units under construction.  

Based on the most up to date data available, unit construction activity in Victoria has reduced by 11% since peaking and in Queensland there are 21% fewer units being built relative to the recent peak.  

While the pipeline of unit supply is winding down across the most oversupplied markets, there has also been  subtle improvements in many of the underlying indicators we use to monitor the health of housing markets. 

Firstly, our measure of capital gains: the CoreLogic home value index, has been showing an improving trend across the unit sector of Australia's largest cities.  This doesn't necessarily mean that unit values are rising, however in Sydney and Melbourne, unit values have been more resilient to falls and in Brisbane the rate of decline has started to ease off after almost two years of unit values trending lower. 

Additionally, there has been an improvement in the proportion of off the plan valuations coming in lower than the contract price.  This has been one of the key pain points for many off the plan buyers; at the time of settlement the valuation comes in lower than the contract price. 

When a valuation comes in low, the lender may seek a larger deposit to maintain the loan to valuation ratio on the loan and/or the buyer is likely to be less willing to settle on the property.

Based on metadata from CoreLogic valuation platforms, in August last year, 60% of Brisbane off the plan units were settling with a valuation that was lower than the contract price. 

The latest data through to the end of February shows valuations less than the contract price had reduced to 47% of off the plan unit settlements.  In Melbourne this measure peaked at 54% in late 2016 and has since reduced to just 23%. 

Another measure we follow closely in apartment resales.  Across the Melbourne's unit market, loss making resales have reduced from 12% of all re-sold units in June 2016 to 8% at the end of 2017.  Brisbane is yet to see a peak in loss making resales, with 26% of all unit resales transacting at a loss over the December quarter of last year which is a record high. Considering that many units are selling at a price lower than what their owners originally paid, there is likely to be some bargains to be had.

Other factors likely to be providing some level of support for the unit markets in these cities include higher rental yields relative to houses, more appeal to buyers on a budget thanks to the lower entry point compared with houses and strong demand from both overseas and interstate migration in Melbourne and Brisbane.

Personally, I would still be using a high degree of caution if buying into either of these apartment markets, especially apartment stock that is focused purely on investor target markets and those that offer little in the way of differentiation.  

Unit projects built by developers with a solid track record of quality developments that have a broad appeal to owner occupiers and investors and where the site is strategically located may be worth considering.   

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2018 outlook: No lifeline for the property market

Tuesday, January 30, 2018

Australia’s housing market performance is likely to deliver quite a different result in 2018 relative to previous years as we see lower to negative growth rates across previously strong markets, more cautious buyers, and regulator vigilance around credit standards and investor-generated activity. 

While a gradual transition, the weaker housing market conditions are to continue throughout 2018.  From a macro perspective, in late 2016 we saw a noticeable peak in the pace of capital gains across Australia with national dwelling values rising at the rolling quarterly pace of 3.7%.  2017 then saw growth rates and transactional activity gradually lose steam, with national month-on-month capital gains slowing to 0% in October and November while Sydney values started to edge lower from September.

An examination of the history of previous housing cycles gives us some clues about what we can expect. 

Namely, the most recent national housing downturn occurred for a brief period between September 2015 and March 2016 when dwelling values nationally fell 1%.  This temporary fall was due largely to tighter credit conditions as a result of the first round of macro prudential changes announced by APRA in December 2014. However, the market rebounded on the back of a 50 basis point reduction in interest rates and renewed availability of investment credit once lenders had comprehensively achieved the APRA mandate of less than 10% growth in investment lending. 

The previous downturn in 2010 was much more organic. National dwelling values fell by 6.5% between mid-2010 and February 2012, ranging from a 10.6% fall in Brisbane to a 3.7% decline in Sydney.  This downturn was due to a removal of first home buyer stimulus coupled with the RBA lifting interest rates from generational lows following the financial crisis.  Recent downturns were also recorded in 2008 when national dwelling values fell 7.9% and in 2004 when values edged 2.6% lower nationally.

While conditions were very different across each of these periods of a falling dwelling values environment, the lesson here is that the housing market is cyclical, with its cycles generally heavily influenced by either monetary policy (rising/falling interest rates), policy changes (for example the latest rounds of macroprudential changes or shifts in taxation policy) or by economic shocks such as the global financial crisis.

The primary driver for a new phase in the current housing cycle is tighter credit policies.  The first round of macroprudential measures introduced by APRA in December 2014 resulted in a temporary slowdown in the market, however a loosening of credit availability and lower mortgage rates threw a lifeline to the housing market.  We don’t expect to see a lifeline thrown to the residential property market in 2018. 

Credit policies are likely to remain tight, with regulators keeping a watchful eye out for a rebound in investment credit growth or a reversal in the trend towards fewer mortgages with a loan to valuation ratio of more than 80%.

Interest rates will stay on hold in 2018.  If higher interest took effect, rates would stifle household consumption and business investment and could cause financial distress amongst a highly indebted household sector, however rates aren’t likely to fall due to concerns of refueling the controlled slowdown in the housing market.

National dwelling values will fall further in 2018, driven lower by falls across Sydney and to a lesser extent, Melbourne.  After values surged 75% higher over Sydney’s growth cycle and 59% higher across Melbourne, it’s rational to expect some slippage in dwelling values across these cities.  The remaining capital cities are likely to see more positive conditions. 

The pace of capital gains has been sustainable across Brisbane and considering the improving labour market and rising migration rates, we could potentially see Brisbane record a higher rate of growth in 2018 compared with 2017.  New investment-grade unit developments around key inner city precincts are likely to be the weak link across the Brisbane housing market.

Adelaide’s housing market has also recorded a sustainable pace of capital gains over the past five years, however economic conditions and demographic trends aren’t as strong as Brisbane’s.  The second half of 2017 saw the pace of capital gains easing across Adelaide which may continue into 2018, although we would be surprised if values trended lower over the year.

The Perth housing market is moving through the bottom of its cycle, with dwelling values edging slightly higher towards the end of 2017 after falling 11% since values peaked in 2014.  The recovery phase is likely to be a gradual one for Perth, with a large amount of detached housing supply around the outer fringes of the metro area likely to weigh down the headline figures.    

Hobart’s housing market is experiencing dramatic growth that is unlikely to be sustained.  Dwelling values were up approximately 11% in 2017 which came after a long period of sedate housing market conditions.  The trend rate of growth had shown signs of slowing over the final quarter of 2017 and dwelling values are likely to continue rising but probably not at a double digit annual pace. 

The Darwin housing market is continuing to move through a material correction, with dwelling values down 21% since peaking in early 2014.  Migration rates are yet to see a turnaround while simultaneously, annual jobs growth is negative which suggests the market will remain weak until we see a turnaround in the local economy.  The final quarter of 2017 showed no indication that the downwards trend in housing values was turning around, however transactional volumes have started to edge higher and rental yields are amongst the highest of any capital city which may be attractive to investors and owner occupiers.

Canberra’s housing market has shown reasonably strong growth conditions, however there were signs in late 2017 that growth rates were starting to ease as credit conditions tightened.  Despite relatively high housing prices, the Canberra housing market remains affordable compared with larger capital cities, thanks to higher household incomes.  Rental yields remain well above the national average suggesting rents and dwelling values are reasonably balanced.

Australia’s regional housing markets can loosely be divided amongst satellite cities adjacent to the major capitals, mining intensive areas, regional lifestyle markets and rural/agricultural markets. 

While agricultural areas are more dependent on weather events and global demand for farming products, mining regions have generally shown an improving trend as values bottom out after a long and substantial decline.  Many of the worst hit mining areas are now seeing inventory levels reduce and transaction numbers rise which is supporting a gradual improvement in dwelling values.  The road to recovery is likely to be a long one for many of these regions however, high commodity prices, a lower Australian dollar and improving levels of investment should support a strengthening trend in these areas. 

On the other hand, lifestyle markets have benefitted from the improved wealth positions of property owners in Sydney and Melbourne; this has been the catalyst for healthier tourism trends.  After dwelling values across most lifestyle markets trended lower after 2008, these regions are generally recording strong demand and rising values which is likely to continue in 2018.

Satellite cities such as Newcastle, Geelong and Wollongong have started to outperform their capital city counterparts thanks to better affordability, improved transport linkages and a spillover of demand from the metro areas of the capital cities.  While growth probably won’t be as strong in 2018, there is a likelihood that these regional markets will continue to show a higher rate of capital gain relative to the adjacent capital cities thanks to the diverse buyer demand and better affordability.  Similarly in Queensland, the Gold and Sunshine Coasts have both recorded stronger rates of annual growth than Brisbane.  The growth in these markets is not being driven by a spillover from Brisbane but rather growing demand from interstate buyers for properties to both live and invest in.

Overall, 2018 is set to be a quieter year for the property market.  Previous downturns have seen the annual number of sales fall by around 20-25% from peak to trough; considering the cyclical peak in transactional activity occurred over the twelve months ending August 2015, year on year transactional activity is already 13.2% lower than the most recent peak. 

Industries reliant on housing turnover, such as real estate agencies, valuers, brokers and peripheral services such as pest and building inspectors and conveyancers could be in for a leaner year in some markets.  Businesses seeking to maintain their revenue uplift will need to work smarter and look for new ways to improve their overall market share.

With sales transactions are already down nationally, some markets are bucking the trend.  Year on year sales activity increased across four of the eight capital cities in 2017, including Perth, Darwin, Adelaide and Hobart where demand is generally rising from a lower base. 

While our outlook for next year may not be all that uplifting, relative to 2017, there are plenty of factors that will work to keep a floor under housing demand.

Although credit polices are likely to remain tight, mortgage rates will remain low in 2018, providing a positive lending environment for those who are able to secure credit. 

Regulators and policy makers will be encouraging households who hold high levels of debt to reduce their exposure while rates remain low.  Household debt levels are at record highs, a factor which has been called out by the Reserve Bank repeatedly, as well as international institutions such as the OECD, BIS and IMF.  With interest rates remaining low, the opportunity for households to pay down debt could come at the expense of broader spending on retail and discretionary items.

Prospective borrowers, particularly investors, may find securing a mortgage won’t get any easier in 2018, with APRA restrictions on both investment related credit growth and interest only loan settlements remaining in place.  Additionally, lenders are likely to be more cautious around lending in higher risk areas such as inner city apartment markets where current and pending supply pipelines are substantial.

Labour markets have tightened, with a new trend towards more full-time jobs rather than part-time.  Jobs growth is becoming broader based, ramping up in the previously weak states of Queensland, Western Australia and South Australia.  A firmer labour market will help to support consumer confidence and mortgage serviceability and potentially place some upwards pressure on the near-to record low levels of wages growth. 

Migration rates have been trending higher which may continue into 2018, providing a driver for housing demand.   Overseas migration into Victoria and New South Wales reached record highs in 2018 and interstate migration has been on a clear upwards trajectory across Victoria, Queensland, Tasmania and the ACT. 

In summary, CoreLogic is expecting softer housing market conditions through 2018, driven by a continuation of the slowdown that is clearly evident across Sydney and to a lesser extent, Melbourne.  While the headline figures are set to weaken, below the surface the individual cities and regions of Australia will continue to operate under their own distinct cycles which are subject to more localised forces of demand and supply. 

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Brisbane property market booming

Tuesday, December 19, 2017

By Tim Lawless 

Brisbane is well placed to take over as the best performing capital city housing market over the next five years.  Dwelling values across Australia’s third largest capital city have risen at the annual rate of 1.2% of the past decade; that’s half the pace of inflation and dramatically lower than Sydney or Melbourne where annual gains have averaged 6.3% and 5.9% over the past ten years.

Brisbane’s housing market won’t outperform other cities simply because the market has previously underperformed, however the relative gap in pricing between Australia’s largest cities is likely to be one of the factors that attracts housing demand to the city.  At the end of November 2017 Sydney house values were 102% higher than Brisbane’s and Melbourne values were 57% higher.  Based on median household incomes, Sydney households are earning only 12.9% more than households in Brisbane’s and incomes across Melbourne are actually 0.7% lower than Brisbane’s.  

Clearly households aren’t as affected by affordability in Brisbane as significantly as they are in the larger capitals.  This is also visible from more formal affordability measures such as the dwelling price to income ratio and the proportion of household income required to service a mortgage.  In Sydney, the dwelling price to income ratio is 9.1 compared with 7.5 in Melbourne and 5.9 in Brisbane.  Similarly, the proportion of gross annual household income required to service an 80% LVR mortgage is now 48.4% in Sydney compared with 39.9% in Melbourne and 31.7% in Brisbane.

Importantly, there are a variety of economic and demographic factors that are likely to support improving market conditions across Brisbane including economic and demographic trends as well as a worsening performance across the larger cities of Sydney and Melbourne which will provide a lower relative benchmark for Brisbane.

Population growth from both overseas and interstate is ramping up into Queensland, with the majority of this growth being experienced within the South East corner of the state.  Net overseas migration remains well below New South Wales and Victoria, however it’s the highest in a bit more than three years.  Net interstate migration is where Queensland is demonstrating its pulling power, attracting the highest number of residents from other states in eight and a half years.  Net migrants crossing the state border into Queensland is now the highest of any state, outpacing Victoria for the first time since June 2013.

Higher migration rates implies more demand for housing which should help to support an improvement in capital gains.

The labour market is also strengthening across Queensland.  Jobs growth across the state was the fastest of any state or territory.  Based on trend data, the annual rate of jobs growth reached 4.8% over the twelve months ending November 2017, substantially higher than any other region.  In raw numbers, 113,000 jobs were created across Queensland over the past year, more than New South Wales (111,000) and Victoria (94,000).

Jobs are an essential component of a healthy housing market and a strong labour force has been a key missing ingredient from the Brisbane housing market up until recently.  The improved jobs sector, together with high rates of migration and an affordable mix of housing is a solid recipe for stronger housing market conditions.  

Although Im expecting Brisbane to outperform, at least over the medium term, there are likely to be some headwinds that will prevent a surge in housing values.  Credit conditions are much tighter now relative to the period between 2012 and 2016 when Sydney and Melbourne experienced their peak rates of growth.  The unit market is also likely to hold back the performance of the housing somewhat due to unprecedented supply of new units over recent years.  

Additionally, while mortgage rates are likely to remain around their current historically low setting until around 2019, the cost of debt will eventually move higher which is likely to curb any momentum in the housing market when it eventuates. 

Although Brisbane looks primed to experience an improvement in housing market conditions over coming years, I wouldn’t necessarily expect that the rate of growth in Brisbane will reach the heights of those experienced in Sydney and Melbourne over recent years.

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How expensive is the housing market?

Tuesday, November 28, 2017

By Tim Lawless
 
When asked ‘how expensive’ a housing market is, most people will refer to the median price or median value of properties in the market. The median price is a perfectly valid and meaningful way to get a quick feel for the pricing of a typical house or unit in a given region, however the median doesn’t give much of an indication about the range of housing prices.

A ‘typical’ buyer may be looking for the ‘typical’ house or unit, but most prospective buyers aren’t exactly ‘typical’. Some will be looking for properties at the higher end of the pricing spectrum, while others may be seeking out entry level properties that are better suited to a slim budget. For this reason, examining quartiles or even deciles can give a much better view on the range of housing within a region.

Take the Sydney housing market as an extreme example. The median house value in Sydney at the end of the October was $1.076 million. Clearly housing prices in Sydney are high and unaffordable for many. However, if we look at the range of pricing, entry level house prices are typically around $615,000 or less (based on the first decile) while for those seeking out a property at the highest end of the market, they will generally be spending at least $3.351 million (based on the ninth decile). The interdecile range, which is simply the difference between the first and ninth decile is a substantial 261% or $1.6 million.

Sydney (261%) shows the largest spread in housing prices by quite some margin relative to the other cities. Melbourne (223%) is the only other city with a spread of more than 200%, while Darwin (95%) is the only city where the spread is less than 100%.

The diversity in housing prices can be extreme in some suburbs. Based on an analysis of SA3 statistical regions (SA3’s are part of the Australian Bureau of Statistics standardised geography classifications), Melbourne’s Stonnington East shows the greatest diversity of housing values in Australia with an interdecile spread of 530%. The valuation spread ranges from $477,8000 at the tenth decile to $3.009 million at the ninth decile.

The capital city region with the least diversity in house values is St Mary’s, located about 45km west of Sydney within the Penrith council area. The interdecile range is 37%, ranging from $519,000 (first decile) to $761,000 (ninth decile).

The range in dwelling values across a suburb or, for that matter, a city, highlights how diverse housing markets are. While it’s important and useful to track housing market conditions broadly to understand the trends in market performance, when buying a property its all the more important to drill down below the surface and understand the microcosm of housing values. Values can, and will, vary remarkably based on factors such as location, quality of the dwelling, area and shape of the land and proximity to key points of interest which can add a premium, or in some cases a discount, to the property’s value.

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Is now the right time for first home buyers?

Tuesday, October 17, 2017

By Tim Lawless

First home buyers are clearly ramping up across the housing market. The most recent data from the ABS showed a surge of first home buyers in July, with the number of housing finance commitments reaching the highest level since November 2013. First home buyers now represent 16.6% of the owner occupier market, which is the highest proportional level of activity from this segment in four years.
 

So why are first timers rushing back into the market? There are a few reasons. New stamp duty concession went live in July across New South Wales and Victoria. Under the changed rules, first home buyers in New South Wales receive a full stamp duty exemption if buying a dwelling priced under $650,000, while in Victoria the rules apply to properties under $600,000. In NSW, this equates to a potential saving of nearly $25,000 and in Victoria, where stamp duty rates are higher, the potential first home buyer saving is more substantial at just over $31,000.

With housing affordability an ongoing issue in Sydney and, to a lesser extent, Melbourne, the savings on stamp duty provide a decent leg up for first home buyers, so it’s understandable that many would be taking advantage of the incentive. First time buyers in Sydney and Melbourne should be aware that these incentives have come after five and a half years of solid capital gains and recent signs that that housing market is weakening. A $25,000 to $30,000 dollar saving could be wiped out over the next year if property prices trend lower.

In Sydney, where the median dwelling value is $909,600, it would only take a fall of 2.75% before the $25,000 saving evaporates. In Melbourne, where housing market conditions have been more resilient, dwelling values would need to fall by approximately 4.3% before the $30,000 dollar stamp duty concession is wiped out.

Of course, most first home buyers will be in the housing market for a long period of time and across several cycles. Time tends to heal all wounds, and for many, getting a foot in the housing market door via saving for a deposit and funding the high transactional costs is often the hardest part for many prospective first home buyers. Despite the very real risk that values could move lower, I think first home buyers will continue to take advantage of the cost savings on offer.

It’s not just Sydney and Melbourne where first home buyer activity is ramping up; most other states and territories are also seeing an acceleration of first home buyer participation. This rise in activity hasn’t been accompanied by an announcement of new stamp duty concessions or other incentives. On this basis, the rise in first home buyer activity outside of New South Wales and Victoria is more organic and based on this segment of the market taking advantage of low mortgage rates and an increased appetite from banks to lend for owner occupation.

The reduction in investor market activity is also likely to be contributing to higher levels of first home buyer competition as the first home buyers and investors tend to compete for similar housing stock. The pace of capital gains in most of these capital cities has been much more sustainable, if not negative, and the risks of a downturn are arguably less pronounced.

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Wealth created via housing

Tuesday, September 19, 2017

By Tim Lawless

The strong capital gains evident across the Sydney and Melbourne housing market have created a significant boost in wealth for home owners who were fortunate enough to own a property through the latest growth cycles., However across other housing markets, the rate of capital gain has been remarkably lower with home owners outside of Sydney and Melbourne seeing far less accrued equity from their housing assets.

On the flipside, there are also those housing markets where dwelling values have fallen, particularly in areas associated with the mining sector, where a larger proportion of properties in these regions are now worth less than their original purchase price.

With this in mind, I thought it would be interesting to measure two aspects of wealth accumulation via the housing sector: what proportion of dwellings are now worth double their purchase price and what proportion are worth at least 10% less than their purchase price.

Proportion of properties worth at least double their purchase price


Nationally, the proportion of dwellings where the value of the property is at least double the purchase price has slipped over the past decade, falling from 45.4% of dwellings in 2007 to 39.1% in 2017. The slippage is evident across regions outside of Sydney and Melbourne where capital gain conditions have been much softer over the past decade.

The proportion is highest in Sydney, where 48.1% of dwellings are now worth at least double what their owners paid for them; ten years ago the proportion was much lower at 37.2% Melbourne follows close behind with 47.3% of dwellings worth at least twice what their owners paid (up from 38.1% ten years ago).

The remaining capital cities show a much lower proportion of dwellings that are worth at least double their purchase price, ranging from 25.9% of dwellings in Darwin to 37.4% in Hobart. Across the broad ‘rest of state’ markets outside of the capitals, regional Victoria stands out as showing the highest proportion of properties worth at least double the purchase price at 40.8%, followed by regional Western Australia at 34.8%.

The high proportion of properties worth at least double their purchase price across regional WA may come as a surprise, given the weak performance of the housing market across this region over the past five years, however a decade ago the proportion was substantially higher at 60.8%.

Proportion of properties worth at least 10% less than their purchase price


Over the past decade, the proportion of properties valued at less than 10% of their purchase price has risen slightly from 3.2% to 3.4% between 2007 and 2017. The national figures hide a significant difference between the major regions of the country. The highest proportion of dwellings worth at least 10% less than their purchase price can be found in regional Western Australia, at 17.8%. Darwin (15.1%), Perth (11.1%) and regional Queensland (11.0%) have also recorded a significant proportion of dwellings where values have slipped more than 10% below the purchase price.

Only ten years ago, while the mining boom was in its early stages, regional Western Australia and Perth were recording the lowest proportion of dwellings where the value was more than 10% lower than the purchase price. In 2007 only 1.1% of Perth properties and 2.3% of regional Western Australian properties fit this profile.

The lowest proportion of dwellings with a valuation more than 10% lower than the purchase price can be found in Sydney (0.7%) and Melbourne (2.1%). Ten years ago, 7.1% of Sydney dwellings recorded a valuation that was more than 10% less than the purchase price, highlighting the effect of strong capital gains post GFC.

Drilling down to the suburb level, it is clear how hard mining towns have been hit. The Bowen Basin town of Dysart tops the list with 65.7% of dwellings showing a valuation that is at least 10% lower than the purchase price. Queensland’s Gladstone Central is close behind at 64.2% followed by South Hedland in the Pilbara region of Western Australia at 64.0%.

The good news for many of these mining regions is that housing market conditions seem to be moving through the bottom of their cycle. Transaction numbers are generally rising and advertised stock levels are reducing which should help to promote some value recovery in these regions.

With growth in the housing market now easing across Sydney and, to a lesser extent, Melbourne, we may start to see a slow reversal of these trends.  It will be harder to double the value of a property in Sydney and Melbourne after such a sustained period of high capital gains, however markets such as Hobart and Canberra, which have gathered some momentum, are likely to see home owners benefit from improved capital gains that is likely to boost their overall wealth profile.

Similarly, the worst appears to have past for the mining sector, although it is likely to take many years before property values recover to their previous highs in many of these regions.

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What’s behind the subdued first-home buyer activity?

Tuesday, August 15, 2017

By Tim Lawless

First-home buyers are close to record lows in many of Australia’s states and they are below the long-term average in every state except Western Australia. As at the end of April 2017, first-home buyers comprised just 13.9% of all owner-occupier mortgage demand nationally. The situation is worse in New South Wales, where first-time buyers comprised only 8.4% of the market over the first four months of the year. Based on the long-term average, first-home buyers ‘normally’ comprise around one fifth of owner-occupier demand across New South Wales.

Is housing affordability to blame?

With first-home buyer participation declining as prices rise, it’s easy to suggest that housing affordability is to blame for the low participation rate - but that is probably only part of the reason. South Australia, for example, doesn’t have the same affordability challenges as New South Wales, yet first-time buyers are the second lowest of any state at 12.2%. First time-buyer activity in Victoria (16.6%) is more substantial than participation in Tasmania (15.2%), where housing is the most affordable of any state.

Availability of jobs is an important factor for first-home buyers. This is likely to be one of the factors supporting first-time buyer demand in Victoria, even though stamp duty rates (prior to July 1) are high and affordability measures are the second highest of any capital city outside of Sydney. Over the past five years, 39% of the jobs created nationally have been in Victoria, which is substantially higher than the long term average of 24%.

The two states where first-time buyers are most active, at least on a proportional basis, are Western Australia, where first-time buyers comprise 28.4% of owner-occupier mortgage demand, and Queensland at 21.5%. First-home buyers are higher than the long-term average in Western Australia, and Queensland first timers are close to the long-term average participation rates. Jobs growth has been mild across both states over the past five years, however housing prices have been tracking lower in Perth and increasing roughly in line with incomes in Brisbane. The dwelling price to income ratio in Brisbane is 5.9 and in Perth its 6.0; substantially lower than the larger capital cities. It’s likely that the healthier affordability of housing in these regions, despite the mild jobs growth, is a primary factor in supporting first-time buyer demand.

Other factors come back to transaction costs, particularly the cost of stamp duty and deposit. There is a high likelihood that stamp duty exemptions for first-home buyers, which went live on July 1st in Victoria and New South Wales, will temporarily boost first time buyer numbers in the market. While the exemptions are likely to drive first-home buyer demand, it’s likely that additional demand concentrated across the lower priced end of the market could simply push prices higher over the short to medium term. 

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Is the housing market truly slowing down?

Tuesday, May 30, 2017

By Tim Lawless

Early signs pointing to a housing market slowdown shouldn’t come as a surprise given the strong and persistent capital gain conditions over the past five years; longer than most growth cycles historically. 

Included in the signs of an early slowdown are:

  • CoreLogic home values indices have shown an easing in growth rates over the second quarter, with the softer growth reading attributable to weaker conditions in Sydney and Melbourne;
  • Auction clearance rates remain above the long-term average, but have subtly trended lower through April and the first week of May; 
  • Mortgage activity has slowed, particularly from investors, which is evident from CoreLogic valuation platforms as well as from the lagging ABS housing finance data;
  • Transactional activity has slowed, with the number of settled dwelling sales down almost 9% over the 12 months to April 2017 compared with the same period a year ago. 

The softer market readings have mostly flowed though during April, a month which can be seasonally affected by Easter as well as school holidays and the ANZAC Day long weekend. Therefore, it may be somewhat premature to call a peak in the market; the coming months should provide a clearer indication of the how the housing market is trending. 

Many factors contribute to a slowdown in housing market

Importantly, a slowdown in the housing market, if it is upon us, isn’t due simply to the maturity of the growth cycle which has been running now for almost exactly five years. Many other factors are conspiring to slow demand in the marketplace.

It’s the overall dampening effect of new regulatory policies, higher mortgage rates, low affordability, high debt, low cash flow and weak sentiment that is likely creating a barrier for a continuation in the high growth rates that have been synonymous with the Sydney and Melbourne housing markets over the past five years.

Mortgage rates are shifting higher, particularly for investors. The average three-year fixed rate for investor loans increased by 35 basis points between November last year and April 2017, while discounted variable rates are 25 basis points higher since September last year.  Owner occupiers have also faced a rise in their housing repayments; discounted variable rates for owner occupiers are 10 basis points higher between November 2016 and April 2017 and three-year fixed rates are 20 basis points higher. 

At a time when household debt has never been as high, mortgage holders have become more sensitive to the cost of debt, despite mortgage rates remaining close to the lowest level since the 1960’s. It’s likely the higher cost of housing mortgage repayments, as well as stricter servicing criteria from lenders, is discouraging or preventing some buyers from entering the market.

Based on February 2017 data from the ABS, investors comprised approximately 48% of new mortgage demand. Unfortunately, they are now facing the double edged sword of higher mortgage rates and less cash flow on their properties. 

Rental yields in Sydney and Melbourne have also slipped to record-lows over the past five years which is likely to compound the effect of high mortgage rates in the face of low rental yields. 

Additionally, if investors have a perception that market conditions are weakening, this is likely to act as a further dampener on investment demand. After all, who wants to be holding a low yielding asset when value growth is likely to be much lower than what investors have become used to? 

The latest round of consumer sentiment data released by Westpac and the Melbourne Institute pointed to weaker housing sentiment, particularly in NSW and Vic, as well as a further reduction in their ‘Time to Buy a Dwelling Index’ which is now tracking 25% below the long run average.

Add to this the latest round of policies from the prudential regulator, APRA, as well as some tweaks to what expenses can be claimed by investors for taxation purposes announced in the 2017 Federal Budget, and the investment scenario is looking all the weaker.

Overall, the next few months of market activity data will paint a clearer picture of whether the housing market is truly slowing down. My expectation is that if we aren’t moving through the peak of the growth cycle in Sydney and Melbourne, it’s probably just around the corner.

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