Remember predictions at the start of the year that Australian house price growth was likely to slow substantially in 2016 and that after rapid growth in previous years, the market had to slow? Well, there’s no sign of that yet. Not by a long shot.
According to the latest CoreLogic home value index for June, capital city house prices rose by 0.5% during the month, leaving the quarterly increase at 3.8%. From a year earlier, they increased by 8.3%.
The monthly increase followed gains of 1.7% and 1.6% in the previous two months.
Big numbers, stemming largely from Australia’s largest city, Sydney.
House prices in the city grew by a further 1.2% in June, taking the quarterly increase to a mind-boggling, and slightly disconcerting, 6.8%.
Yes, that’s not a misprint.
Compounded, that equates to an annual growth rate of 30%. Not something that could be sustained — at least you’d hope.
From January 2009, prices in the city have now surged by 87.9%.
As the table below reveals, Sydney is now on the cusp of replacing Melbourne as the city with the fastest house price growth over the past 12 months. It currently stands at 11.3% compared to 11.5% for Melbourne, with the gap narrowing fast.
Despite the continued increase in house prices nationally, primarily due to continued price gains in Sydney and Melbourne, Tim Lawless, CoreLogic’s Asia Pacific research director, believes the moderation in house price growth seen in June will be welcomed by policymakers.
“The monthly growth rate reduction is likely to be very much welcomed by state and federal government policy makers and regulators who may be concerned about a sustained rebound in capital gains,” says Lawless.
“As an example, home values in Sydney have been rising for four years, and have increased by a cumulative 59% over this time frame. Melbourne dwelling values have been rising for the same length of time and have moved 41% higher over the growth cycle to date.”
While not to dismiss Lawless’ opinion, I’m not sure everyone will share his view that the moderation in house price growth will be welcomed by policymakers.
The slowdown was largely driven by weakness in other capital cities, something that dragged down the national average during the month. At 1.2% and 0.8% respectively, there’s little indication that the Sydney and Melbourne markets are slowing down.
Quarterly increases of 6.8% and 3.5% say they’re doing exactly the opposite.
As a result of the rapid gains seen in recent years, CoreLogic, using data provided by the Australian National University, notes that Sydney’s house price to income ratio now stands at 8.2, slightly above Melbourne at 6.8.
That’s 8.2 times the median annual household income to buy a median valued property in Sydney, and 6.8 times for Melbourne.
They’re certainly at elevated levels, especially considering the number of two income households that now exist in Australia.
As a result of stretched valuations, Lawless suggests house price growth are likely to moderate in the period ahead.
“Australia’s two largest cities are facing increased affordability challenges that are likely to negatively impact the trajectory of dwelling values and activity as more prospective buyers are blocked from the market,” he says.
Although it’s yet to impact on house price growth, Lawless suggests that there’s signs this may already be occurring in Sydney.
“Some positive news for Sydney buyers is that there are early signs that Sydney’s housing market may be starting to turn in favour of the buyer,” says Lawless.
“We’re seeing homes in the city taking longer to sell and vendors are starting to offer larger discounts on their asking prices in order to make a sale. The typical Sydney home is now taking 40 days to sell compared with 26 days a year ago and discounting rates have risen from 5.5% a year ago to 5.6%.”
Housing finance data has also moderated of late, particularly to investors, adding weight to the view that house price growth MAY moderate in the coming months. Lower turnover of housing stock could explain the divergence between housing finance and house price growth of late.
Let’s hope that a moderation in prices does eventuate. Should gains carry on at current pace it’ll not only exacerbate affordability concerns but also increase financial stability risks.
Given their sheer economic importance, increased risks attached to the Sydney and Melbourne property markets automatically imply heightened risks for the entire Australian economy.
Any problems there will mean problems everywhere.