Sydney house prices surged 75% in less than 5 years

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If you bought a home in Sydney before June 2012, it’s now worth 75% more. If the purchase was before 2009, it is has more than doubled in value.

That pretty much sums up the gravity defying run of Sydney home prices with annual growth rate now at 18.4%, the highest since the 12 months to December 2002, according to research firm CoreLogic.

Australian capital city home values climbed 1.4% in February taking the annual growth rate to 11.7%, the best since the 12 months to June 2010.

The run up in home prices has come at a cost, with household debt soaring to record levels and housing affordability considered by many non-existent, adding to regulator concerns and political pressure for governments.

CoreLogic expects price growth to slow as more new apartments hit the market and either banks or regulators move in to curb speculation.

This table from CoreLogic depicts the run up in home values:

Australia’s largest banks have already started putting up investor mortgage rates and the banking regulator last month updated its home loan lending standards.

The Reserve Bank of Australia governor Philip Lowe signaled that soaring house prices may be holding the central bank from cutting rates further to stimulate the economy. The RBA reduced rates twice last year in August and October.

These charts from CoreLogic show the surge in Sydney and Melbourne home prices

“The strong growth conditions across Sydney have provided a substantial wealth boost for home owners, however, the flipside is that housing costs are becoming increasingly out of reach,” CoreLogic head of research Tim Lawless said. “This is especially true for price-sensitive segments of the market such as first time buyers and low income families.”

Dwelling prices are almost 8.5 times higher than gross household incomes in Sydney, according to CoreLogic. In the second most expensive capital city, Melbourne, has a dwelling price-to-income ratio of 7.1.

Melbourne home values climbed 1.5% in February taking gains since January 2009 to 88%, according to CoreLogic.

Investors have driven up prices expecially in Sydney and Melbourne expecting more price gains ignoring sliding rental yields, CoreLogic said.

Average dwelling yield across the combined capital cities fell to another all time low of 3.2% over the month, which is full percentage point lower than the 4.2% recorded five years ago, CoreLogic said.

“Despite the record low rental yields on offer, investor demand remains high, suggesting investors are likely to be relying on a negative gearing strategy to compensate for their cash flow losses,” Lawless said referring to tax breaks investors can claim on losses incurred on their property. “It also indicates that investors are speculating on future capital gains.”

While fewer properties available for sale has bolstered the market with capital city auction clearance rate holding up abover 70% since last February, things may change with a record supply of new apartments expected.

“I remain of the view that housing market conditions will moderate during 2017 due to affordability constraints impacting on housing demand, as well as higher supply levels and an eventual slowing of investment demand brought about either through changed policies from Australian lenders or via regulatory changes aimed at slowing credit growth across the investment sector,” Lawless said.

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