House prices across the country have continued to grow in value in February, with Sydney and Melbourne again the strongest markets in the country.
According to the latest data from CoreLogic, median house prices across the combined capital cities jumped 1.2 per cent in February. Again it was Australia’s two major cities, Sydney and Melbourne that are doing the bulk of the work at the moment, with both climbing by 1.7 per cent and 1.2 per cent respectively.
Sydney is now only -3.7 per cent off its previous peak, while Melbourne is virtually at the same levels it was during the 2017 boom, after surpassing that level last month.
Across the other capitals, the results showed modest growth, however, Hobart continues to be a strong performer climbing 0.8 per cent.
Meanwhile Perth has started to put together a string of four monthly price increases, suggesting the bottom of the market might have been found.
The same can’t be said of Darwin as prices fell -1.4 per cent during February. Since the peak, Darwin is now off -32.7 per cent.
Corelogic Head of Research, Tim Lawless feels that increased borrowing capacity and improved sentiment are a key reason for the strong growth in prices.
“The primary factors driving this rebound remain in place and include an extremely low cost of debt and improved borrowing capacity,” Mr Lawless said.
“However, considering the sluggish pace of household income growth, housing affordability is eroding rapidly which is likely to see some parts of the market become less active.”
As has been the case for some time, the top end of the market continues to be leading the way, while the regional areas are still clearly lagging.
Mr Lawless said there are some fundamental reasons why there is a divide between the top suburbs and the rest of the country.
“With lenders favouring ‘high quality’ borrowers, buyers with a large deposit and low level of debt relative to their incomes are likely to be those who receive the lowest mortgage rates – another factor that could be supporting demand at the more expensive end of the market,” Mr Lawless said.
“Structural factors may also be at play, including a rise in borrowing capacity following changes to serviceability assessment from APRA in July 2019, and the dominance of owner occupier buyers (rather than investors) through the recovery phase to date.”
Demand moving to the outer suburbs
According to the latest report from CoreLogic, Sydney, Melbourne and (to a lesser extent) Hobart’s affordability constraints are likely to gradually push demand towards the middle and outer ring suburbs, or towards cheaper price points in the medium to high density sector.
These more affordable segments of the market have generally seen lower rates of capital gain over the cycle to date and offer lower barriers to entry, as well as higher rental yields for investors.
Affordability pressures are less pressing across the remaining capital cities. In regions such as South East Queensland and Perth, housing is very affordable relative to Sydney and Melbourne, jobs growth is trending higher and unemployment is reducing.
These could be the markets to watch for a stronger performance later this year according to CoreLogic.
There are some early signs that the rate of growth may have already peaked late last year across Sydney and Melbourne, as affordability constraints dampen participation in the market and advertised supply levels increase.
Mr Lawless also feels that negative global events could potentially impact the market going forward.
“A more significant downturn in consumer sentiment related to the coronavirus outbreak could become a determining factor that impacts the market over coming months,” he noted.
“While housing demand is now relatively insulated from a downturn in foreign buyers, the economic impact on key export sectors such as education, tourism and commodities is likely to result in weaker economic conditions and lower consumer sentiment.
“Consumer sentiment readings are already low, and a further deterioration could see housing market activity start to slow.”
Rental markets
Nationally, rents were up four tenths of a percent in February, taking the annual change in rental rates to 1.4 per cent.
Rental growth generally remains weak across most markets, however, the recent trend has been towards a subtle rise in rental appreciation.
Twelve months ago, the national rental index was rising at an annual rate of just 0.4 per cent. The improvement in rental rates can be attributed to tightening rental supply.
Housing finance data shows investor participation in the housing market is near record lows and new supply additions are tapering.
With housing values rising more rapidly than rental rates, gross rental yields are swiftly compressing. Across the combined capital cities the gross yield was tracking at 3.48 per cent in February; the lowest yield reading since February 2018.
