Sydney home prices record their largest decline in nearly 5 years

Not quite. Picture: Getty Images

Led by declines in the once-hot housing markets of Sydney and Melbourne, Australian capital city house prices fell modestly in November.

According to the latest CoreLogic RP Data capital city house price index, prices slid 1.5% in November, leaving the annual increase at 8.7%.

Prices in Sydney, Australia’s largest and most expensive housing market, fell by 1.4% leaving the median house price at $810,000. Despite the monthly decline, prices still increased 12.8% from a year earlier.

According to Commsec, the monthly decline was the largest registered in close to five years.

At 3.5%, house prices in Melbourne recorded the steepest decline of any capital city, leaving the median house price at $602,500. It was the largest percentage decline in 18 months. Like Sydney, despite the weakness in November, prices increased by 11.8% from 12 months earlier.

Of the other capitals, prices fell by 2.4% in Hobart, 1.3% in Darwin and 0.5% in Canberra. Gains of 0.6%, 0.7% and 0.3% were registered in Brisbane, Adelaide and Perth.

The full breakdown of each capital city’s performance – both in November and over the past 12 months – can be found in the table below supplied by CoreLogic RP Data.

According to Tim Lawless, CoreLogic RP Data head of research, variable rate mortgage increases independent of the RBA, along with tighter lending restrictions in lending to housing investors, are now starting to bite, particularly in Sydney and Melbourne.

“The fact that mortgage rates have risen independently of the cash rate has, in all likelihood, become a contributor to the slowdown in housing market conditions, as well as tighter lending practices evidenced by a recent reduction in lender risk appetite for investment loans and high loan to valuation ratio mortgages,” said Lawless following the release of the November report.

“Tighter mortgage servicing criteria across the board and affordability constraints in the Sydney and Melbourne markets are also having an impact on market demand.

“As a consequence of the tighter lending environment for rental yields, combined capital cities investors, as well as gross rental yields being at near record lows, participation in the housing market from investors has reduced from 54.1% of all new mortgages in May 2015 to 45.4% at the end of September, which is the lowest level since July 2013.”

While Lawless believes the RBA will be pleased that the rate of home price increases is moderating, helping to contain financial stability risks that were clearly building following a rapid increase over the past five years, he suggests continued softening in house prices may create additional risks in Australia’s flourishing residential construction sector in the period ahead.

“As a result of slowing housing market conditions, an additional risk for policymakers is a where a large number of dwellings approved for construction are postponed or withdrawn as developers face fewer presales or lose confidence in their ability to deliver a profitable project to market,” said Lawless.

As the chart from UBS Australia reveals below, Australian building approvals are currently sitting near the highest level on record, right at a time when sentiment towards house prices is softening.

It investigates the historic relationship between Australian building approvals and “whether now is a good time to buy a dwelling”, a component in the Westpac-MI consumer sentiment survey.

Should the historic relationship between the two hold true, it may see some housing developments get postponed, or entirely scrapped, as Lawless suggests.

That’s not great news for an economy already growing below trend, nor for those who recently bought property off the plan in anticipation of further substantial price increases in the years ahead.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.