The high end of the market is leading Australia's property downturn

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  • Australian home prices fell for a ninth consecutive month in June, and are now down 0.8% over the past year.
  • Prices continued to fall in Sydney and Melbourne, Australia’s largest and most expensive property markets.
  • CoreLogic warns tighter lending standards and potential out-of-cycle mortgage rate increases could create additional headwinds for prices.

Australia’s median home price fell for a ninth consecutive month in June, led once again by declines in Sydney and Melbourne.

According to CoreLogic’s Home Value Index, the median price fell 0.2% to $556,384 in average weighted terms, leaving the decline over the past year at 0.8%.

Prices in capital cities led the losses, falling 0.3% from May. In contrast, regional areas continued to outperform with the median price holding steady over the month.

Over the past year, the median capital city price has now fallen 1.6% to $654,366. The regional median increased 2.2% over the same period, lifting to %367,135.

By type of dwelling, median house prices fell 0.3% in June, slightly faster than the 0.2% drop in apartment values.

Over the year, house prices nationally have fallen by 1.2% in weighted terms, again faster than the 0.7% decline for apartments.

Helping to explain the recent divergence in prices across the country, values in Sydney and Melbourne, Australia’s largest and most expensive housing markets, continued to slide last month.

CoreLogic

Sydney’s median price fell by 0.3% to $870,554, leaving the decline over the past three months at 0.9%. Over the past year, Sydney’s median has fallen 4.5%.

Melbourne’s property market also softened with the median value falling 0.4% in June to $716,774. Since March, Melbourne prices have fallen faster than in Sydney, sliding 1.4%, seeing the increase over the past year slow to 1%.

On current form, and given recent housing market indicators such as auction clearance rates, new home sales, housing finance and housing credit growth, annual price growth in Melbourne appears likely to turn negative in the months ahead.

Sydney and Melbourne are home to 40% of Australia’s residential dwellings, and account for around 60% of Australia’s total housing wealth.

That means price movements in those capitals are often influential on nationwide measures.

The high end

Tim Lawless, Research Director at CoreLogic, said the weakness over the past three months was once again concentrated in the top-end of the market, masking a stronger performance from less-expensive properties.

“Declines are more pronounced across the most expensive quarter of the market,” he said following the release of the June report.

“Based on the CoreLogic stratified hedonic index, values across the most expensive quartile of capital city properties were down 1.5% over the past three months while the least expensive quartile saw values hold firm.

“Similarly, over the past twelve months, the most expensive end of the market recorded a decline of 3.6%, while the least expensive end of the market recorded a 1.4% gain.”

Given Sydney and Melbourne are Australia’s most expensive markets, Lawless said those trends largely reflect recent declines in both markets.

“Declines across the most expensive sector of the capital city market is largely attributable to the declines in Sydney and Melbourne, where the upper quartile of property values fell by 7.3% and 2.5% respectively over the past twelve months,” he said.

Outside of Sydney and Melbourne, and fitting with the trends identified by Lawless above, the performance across the smaller capitals was mixed last month with median values lifting in Brisbane, Adelaide and Hobart in June while those in Perth, Darwin and Canberra fell.

Despite the fall in Australia’s median home price over the past year, values have increased in a majority of capitals, ranging from 12.7% growth in Hobart to 1% in Melbourne.

Alongside Sydney, Australia’s mining capitals — Perth and Darwin — are the only two capitals that have seen median values go backwards over the year, falling 2.1% and 7.7% respectively.

“Hobart continues to show the strongest capital gain trend amongst the capital cities with dwelling values rising a further 2.3% over the past three months,” Lawless said.

“Although housing market trends remain very positive across Hobart, the quarterly pace has eased relative to the March quarter when values were up 3.4%.”

So even Australia’s capital city housing market is starting to slow on a quarter-on-quarter basis.

Lawless said that despite positive price trends in many other smaller capital city markets, most housing markets are now starting to cool, in part due to tighter lending standards.

CoreLogic

“While much of the housing market focus has been on the downturn in Sydney and Melbourne, most other cities and regions have also experienced a softening trend in market conditions, highlighting the impact of tighter credit policies,” he said.

And given that lending standards could be tightened even further, Lawless says this could drag on prices even further in Australia’s most expensive markets.

“With lenders now focusing more on overall debt-to-income rations and household living expenses, housing markets where price are high relative to incomes could see less activity as prospective buyers find their borrowing capacity reduced,” he said.

Along with tighter lending policies, Lawless says the risk of out-of-cycle mortgage rate increases is also building, creating an additional headwind for values.

“Although official interest rates are expected to remain on hold until at least late 2019, there is a growing pressure on lenders to lift mortgage rates due to higher funding costs being experienced overseas,” he said.

“Should widespread increases to cost of debt occur, we would expect this could place additional downward pressure on housing market conditions.

“A weaker housing sector would likely show a flow-on effect to economic conditions, creating some drag on consumer spending and dwelling construction and creating challenges for those industries that are at least partially reliant on housing turnover.”

This table from CoreLogic shows the price performance by location and dwelling type in more granular detail.

CoreLogic

PODCAST: A deep dive on property prices with CoreLogic’s Cameron Kusher

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