Sydney house prices just saw their biggest drop in 18 months — and more falls are expected

It’s coming down – but for how long? Picture: Getty Images

Australia’s housing market is slowing down, led by its largest city, Sydney.

According to CoreLogic’s Home Value Index, home prices across the country were unchanged in October in average weighted, down from a 0.2% increase in September.

House prices fell by 0.1%, offset by a 0.2% increase in apartment values.

The flat monthly result saw price growth over the quarter slow to just 0.3%, seeing the annual rate decelerate from 8% to 6.6%.

Source: CoreLogic

Across the capital cities, and explaining the weakness in the national figure, home prices in Sydney fell by 0.5%, leaving the decline over the past three months at 0.6%.

By type of dwelling, house prices fell by 0.7%, outpacing a 0.1% drop in apartments.

At 7.7%, the annual increase in Sydney is now well below the double-digit levels seen earlier this year.

“This is the first rolling quarterly fall recorded in Sydney dwelling values since May 2016, when the first round of macroprudential changes were still working their way through credit policies, and mortgage rates were only just starting to reduce in line with the first cut to the cash rate,” said Tim Lawless, head of research at CoreLogic.

However, as Lawless points out, even with the modest weakness seen in recent months in Sydney, prices in the city have increased rapidly over the past five years.

“Despite the recent downshift in values, Sydney dwelling values are up 74% since the growth cycle commenced in early 2012,” he says.

Helping to offset the weakness in Sydney’s housing market, prices in Melbourne rose by 0.5% in October.

From July, prices increased by 1.9%, leaving the increase on a year earlier at 11%. That’s the second-fastest increase of all Australian capitals over the year behind Hobart at 12.7%.

Lawless said that strong levels of population growth continue to underpin house prices in Melbourne, along with strong jobs growth and comparatively better affordability levels than in Sydney.

However, even with those positive tailwinds for prices, the three-month increase was still the smallest since mid-2016.

Like Sydney before it, prices in Melbourne are also starting to slow.

Source: CoreLogic

Outside of Australia’s largest cities, Hobart prices continued to soar, jumping by 0.9%. Elsewhere prices rose by 0.2% in Brisbane and were flat in Adelaide and Perth.

Prices in Darwin and Canberra fell, declining 1.6% and 0.1% respectively.

Darwin recorded the largest decline in prices over the quarter at 4.4%. Hobart, in comparison, saw prices jump by 3.3%, the fastest increase of any Australian capital.

Mirroring that outcome, Darwin and Hobart also took out bottom and top spot for price changes over the year.

“Hobart is benefitting from renewed housing demand in the form of interstate migration, particularly Sydneysiders and Melbournites who appear to be utilising their enhanced wealth positions to buy very well in Hobart, where housing prices are substantially lower than those in Australia’s largest cities,” said Lawless.

Prices in regional areas were unchanged over the month, and fell 0.1% over the quarter. Still, despite the recent slowdown, regional prices were still up 10.4% over the year in weighted terms.

Despite the varied performance across the country in recent months, Lawless said that price growth nationally is losing momentum, something he put down to actions from Australia’s banking regulator, APRA, to reduce building financial stability risks.

“The slowdown in the pace of capital gains can be attributed primarily to tighter credit policies which have fundamentally changed the landscape for borrowers,” he says.

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan to valuation ratios or higher loan to income multiples.

“Additionally, interest-only borrowers and investors are facing premiums on their mortgage rates which are likely to act as a disincentive, especially for investors who are generally facing low rental yields on investment properties.”

According to the group, gross rental yields for capital city houses stood at 3.1% in October, below that for units at 3.9%.

As seen in the chart below, yields in Sydney and Melbourne remain well below the national averages.

Source: CoreLogic

Looking ahead, Lawless says that the housing slowdown will likely continue in the months ahead should historical patterns be maintained.

“Historically, sustained growth cycles have generally been followed by a period of negative growth, so a further reduction in dwelling values should not come as a surprise.

“While the weaker Sydney housing market is dragging headline growth rates lower, there are a variety of factors that are likely to support a soft landing across Australia’s housing market.”

For those looking for further details of price movements by type of dwelling across the country, this table from CoreLogic has all the answers.

Source: CoreLogic