The Year Ahead – A 2015 Outlook with Tim Lawless
The housing market is moving into the 2015 calendar year with some substantial momentum, with dwelling values 8.5% higher compared with a year ago across the combined capitals. The growth comes on a backdrop of slowing conditions though, with the annual rate of capital gain peaking early in the year at 11.5% over the twelve months ending April.
While values are still rising at a healthy rate, at least at a high level and in trend terms, we anticipate that 2015 will see the housing market dynamic shift geographically. Conditions are clearly softening across Perth, Darwin and Canberra and we expect this trend to continue.
Sydney and Melbourne have been the stands outs for capital gains over the current growth phase, however the level of growth compared with last year is now lower as some heat leaves these markets.
The markets where there has been some acceleration in the rate of capital gain over the past year are Brisbane, Adelaide and Hobart. These are likely to be the cities to watch for a stronger performance over the coming year.
Regionally, we are expecting 'lifestyle' markets to continue their bounce back in buyer demand and values. At the same time, the downturn in commodity prices and mining related infrastructure spending is likely to continue to dampen housing markets across resource intensive regions.
Central to housing market performance will be the direction of interest rates. There is growing debate that the next rates movement may be down rather than up. A further reduction in the cash rate will bring mortgage rates even lower than their current record low settings. Theoretically, lower rates should provide a boost to housing market conditions, however, if this stimulus does transpire, it is likely to be balanced by pervasively low consumer confidence and softer labour markets.
Additionally, the impact of the recent APRA announcement around investment lending may act to restrict the availability of finance to investors. The banking sector will be under scrutiny to keep growth in investor loans at slower than 10% pace of growth which is likely to have some downwards pressure on investor related housing demand.
Overall we are expecting another solid year of housing market conditions and further capital gains, albeit at a more sustainable rate that what we have seen over 2014.
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The RP Data-Rismark Home Value Index results for June 2014 were released earlier this week. The data showed that combined capital city home values rose by 1.4% over the month, partially reversing the -1.9% fall in values in May. Over the 2013/14 financial year, combined capital city home values increased by 10.1% which was the greatest rise in values over a financial year since they rose by 12.3% over the 2009/10 financial year. Although values continue to trend higher, they fell by -0.2% over the June 2014 quarter which is much lower than the recent quarterly peak growth rate of 4.0% over the three months to August 2013. Overall the data suggests that values are continuing to trend higher, albeit at a much more moderate pace than they had been throughout the second half of 2013.
The Reserve Bank (RBA) released data on housing credit for May 2014 which is covered in greater depth within our weekly Property Pulse. The data showed that over the month of May 2014 housing credit grew by 0.5% with owner occupier housing credit up 0.4% and investor housing credit 0.8% higher. Over the year, housing credit has increased by 6.2% with a 5.2% rise in owner occupier housing credit and an 8.3% rise in investor housing credit.
The RBA also held their monthly board meeting earlier this week at which they decided to keep official interest rates on hold at 2.5%. It was the eleventh straight month that there was no change to official interest rates. The statement following the meeting indicated that interest rates are likely to remain on hold over the coming months.
The ANZ-Roy Morgan Weekly Consumer Confidence measure was effectively unchanged over the week, down 0.3% over the week ending 29 June 2014. Confidence is higher than it was a month ago however, at a reading of 105.4 points it remains well below its long-term average of 113.1 points. Confidence has failed to significantly rebound following the initial budget leaks which caused a significant fall in confidence.
Weekly Clearance Rates
Auction clearance rates increased over the week with the capital city weighted average clearance rate recorded at 66.6%, rising from 65.4% over the previous week. There were 1,991 auctions held over the week compared with 1,572 over the same week a year prior however, auction numbers were slightly lower than the 2,040 the previous week. RP Data collected 86% of all auction records. The major auction markets of Sydney and Melbourne continued to record healthy auction results. Sydney’s clearance rate was 71.1% across 864 reported auctions, the city's highest auction clearance rate in four weeks. Melbourne’s auction market recorded a clearance rate of 68.3% across 811 collected auction results. The clearance rate in Melbourne last week was the lowest in 3 weeks however, the number of auctions is significantly higher than the 719 auctions over the same week last year.
Weekly Advertised Listings
Over the four weeks to 29 June, there were 36,622 newly advertised properties listed for sale nationally. New listing numbers have continued to trend lower, which likely to be mostly a seasonal phenomenon. Nationally, new listings have moved to be -6.2% lower than a year ago, while across the combined capital cities new stock being added to the market is v-2.2 lower than at the same time last year.
There are currently 242,219 properties listed for sale across the country. Total listings at a national level were -2.4% lower compared with the same time last year. Across the combined capital cities, total listings remain -7.0% lower than a year ago, highlighting that total stock levels have reduced. View larger image.
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The June RP Data Rismark Hedonic Home Value Index finished the financial year only slightly into double digit growth figures, with capital city dwelling values moving 1.4% higher for the month after posting a 1.9% decline in May.
Capital city dwelling values have shown a 1.4 per cent capital gain over the month of June 2014, with all cities apart from Adelaide and Darwin recording a rise in dwelling values. According to RP Data research director Tim Lawless, the strong result has partially reversed last month’s 1.9 per cent fall and provides a -0.2 per cent decline in dwelling values over the June quarter.
Over the 2013-2014 financial year the top performing cities for capital gains have been Sydney and Melbourne where dwelling values are up 15.4 per cent and 9.4 per cent respectively across each city. The Brisbane housing market, where conditions have generally remained relatively sedate, is now gathering some pace with dwelling values moving 7.0 per cent higher over the past twelve months, the third strongest result of any capital city. On the other hand, the index results show that the softest performances over the past year have been recorded in Hobart (2.5 per cent), Canberra (2.9 per cent) and Adelaide (2.9 per cent).
Over the current growth cycle, capital city dwelling values are up 15.5 per cent, with Sydney recording the most significant capital gain at 23.1 per cent growth since the end of May 2012. Adelaide’s housing market recorded the least significant capital gain over the cycle to date, with dwelling values rising by 5.6 per cent.
According to RP Data’s Tim Lawless, the recent volatility in the month-to-month Index reading is likely to be a seasonal factor. "The last time we saw a negative quarterly movement in our combined capital city index was May last year. The recent reduction in capital gains is likely a correction from the strong market conditions reported over the first quarter of the year."
"Looking through the monthly movements, the trend in performance is much more important. It shows that the quarterly rate of growth peaked across the Australian housing market in August last year at 4.0 per cent. Since that time the rate of capital gain has generally trended towards a more sustainable level. The slowdown in dwelling value appreciation will be a welcome relief to policy makers and those seeking to buy into the housing market," Mr Lawless said.
From a total returns perspective, Sydney once again stood out as having provided the most outstanding performance. Combining the capital gain with the gross rental yield over the year has provided Sydney home owners with a total return of 20.2 per cent over the financial year. Melbourne, Darwin and Brisbane have also recorded a total gross return in excess of 12 per cent over the year.
Across the different price segments of the housing market, the broad middle -priced sector of the market is now showing the highest rate of annual change. Dwelling values at the most affordable end of the capital city housing markets have moved 8.8 per cent higher over the past year compared with a 10.3 per cent capital gain across the most expensive suburbs and a 10.6 per cent increase across the broad middle fifty per cent of the capital city market.
Looking at rental markets, gross rental returns are currently recorded at 3.9 per cent for capital city houses and 4.6 per cent for capital city units. The yield environment is lowest across Melbourne where gross yields are averaging just 3.4 per cent for a typical house and 4.3 per cent for units. Darwin continues to show the highest gross rental yields at 6.1 per cent for houses and 5.9 per cent for units.
Mr Lawless said, "With interest rates remaining low for the foreseeable future, it is doubtful that housing values will start to slide, at least not at a macro level. What is more likely is that natural affordability constraints will start to dent buyer demand, as will the low rental yield scenario’s that are very much evident across the largest capital cities of Melbourne and Sydney."
Other indicators such as clearance rates are holding relatively firm which, according to Mr Lawless, further reinforces the notion that the housing market isn’t set to show a market correction.
Over the month of June, clearance rates strengthened and are generally around the high 60 per cent mark across the capital cities week on week. Average selling and vendor discounting rates also levelled out at relatively strong readings, and listing numbers remain relatively tight.
"Activity across RP Data valuation platforms has also held firm at relatively high levels suggesting mortgage demand isn’t dropping off just yet," Mr Lawless said.
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Total outstanding housing credit is increasing at a moderate pace compared with the historic trend however, with housing credit aggregates and household debt also starting to rise it may raise some alarm bells with the Reserve Bank.
Each month the Reserve Bank (RBA) releases financial aggregate statistics which detail the amount of credit lent by domestic financial institutions. The latest data to May 2014 shows that outstanding credit grew by 0.4% over the month and is 4.7% higher over the year. The annual increase was comprised of a 6.2% rise in housing credit, a 0.3% increase in other personal credit and a 2.7% increase in business credit.
As the first chart shows housing credit is currently and has historically been the main driver of the overall expansion in credit.
The housing credit data is further broken down into credit for owner occupier housing and credit for investment housing. Over the 12 months to May 2014, owner occupier housing credit has increased by 5.2% and investor housing credit has increased by a greater 8.3%. The annual rise in owner occupier credit is the greatest since March 2012 and for investor credit the rise is the largest since August 2010. On an historic basis the level of credit expansion is quite low, over the past 20 years, the average annual increase in owner occupier housing credit has been recorded at 11.3% and investor credit has averaged 16.0%.
The annual change in owner occupier housing credit reached a recent low of 3.9% between January and March of 2013 indicating that the recent rise has been quite strong. Investment housing credit troughed at an annual increase of 4.8% in January 2012 and has since increased to 8.3% annual growth. Clearly growth in investment lending has been very strong over the past 18 months, in-line with the growth in home values which has been recorded since mid 2012.
If we look at the total value of outstanding credit, we can also see that the vast majority of lending by financial institutions is for housing as opposed to other personal or business loans. Data from the RBA shows that as at May 2014, a record high 60.6% of all credit was for housing, a record low 33.2% of credit was to business and 6.2% was for other personal credit provisions. Of course, there is only so much money available to be lent by Australian financial institutions and they are showing a clear preference of lending for mortgages. In fact, lending for mortgages has been the preferred option for banks consistently since April 2001, right as the housing market started to boom.
The likely reason for the preferential treatment of lending for mortgages over businesses is the ongoing relatively strong performance of mortgages. Despite internal and external shocks there haven’t been long-term mass declines in home values and mortgage arrears rates have remained low. Furthermore, mortgagees have seen equity in their homes increase and they have used this to fund alternate investment and in some instances fund the start-up of small businesses. Until these conditions change it is hard to see why financial institutions wouldn’t prefer to fund mortgages rather than businesses which have been more risky to lend to. That of course is not to say that the performance of the housing market won’t change and the current preferential treatment of mortgage lending is a guide to the future lending preferences of financial institutions.
Each quarter the RBA publishes data on the ratio of household debt to disposable income. The latest data to March 2014 shows that the ratio of total debt is 149.9% which is its highest since September 2010. The ratio of housing debt was recorded at 135.8% which is its highest on record. With home values rising and credit growing households are taking on additional housing debt. One would think that this is the most problematic development for the RBA. Household debt levels are already high (much higher than public debt) and although household savings has increased over recent years there has been no significant reduction in household debt levels and they are now rising.
With a greater number of people looking to purchase homes we are seeing housing credit once again escalating which has now flowed through to a rise in household debt. We have no doubt that both RBA and APRA will be keeping a close eye on household and housing debt levels as growth in national home values continues. If debt levels continue to rise it is likely to be a potential cause for concern with households becoming more indebted at a time when interest rates are so low. When interest rates inevitably rise in the future, some households may find it harder to repay that debt.
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The national population increased by just over 396,000 new residents over the 2013 calendar year; 9,300 fewer new residents compared with the annual period ending June 2013.
Population growth is an important indicator for the housing market as it represents a proxy for housing demand; more residents imply more people who require accommodation. The rate of national population growth reached a record high over the 2008 calendar year, recording an annual growth rate of 2.2%; since then population growth fell away sharply, reaching a recent low point of 1.4% over the year ending March 2011 before rising to a new recent highpoint of 1.8% over the 2012 calendar year. The latest data from the Australian Bureau of Statistics indicates the rate of population growth has been slipping since mid last year, slowing to an annual growth rate of 1.7%.
Despite the slowdown, population growth remains well above average. The graphs immediately below show the trend in the components of national population growth. The level of natural increase (ie births minus deaths) was 8.6% higher than the ten year average and 19.1% higher than the 30 year average over the 2013 calendar year. Net overseas migration was tracking substantially higher than average at 16.7% above the ten year average and 78.6% above the 30 year average.
At the state level there are some diverse trends across the components of population growth. In raw numbers, NSW is continuing to attract the largest number of new residents, at 110,923 over the 2013 calendar year. Victoria showed the second largest number of new residents (107,916) followed by Queensland (79,706) then Western Australia (71,301).
Net overseas migration is the largest component of population growth across each of the states except Tasmania and the Australian Capital Territory, where natural increase outweighs net overseas migration numbers. The number of overseas migrants is highest in New South Wales where there were 71,446 net migrants over the calendar year. Victoria showed the second highest number of overseas migrants at 62,337. Both of these states are continuing to show a healthy upwards trend in overseas migration. Net overseas migrants into WA were the third highest of any state, at 45,401, but there has been a substantial decline over the year with overseas migrant numbers down 19.8% compared with the 2012 calendar year. A similar trend is evident in the other mining state, Queensland, where overseas migration is down 19.1% over the year.
-- VIEW STATE GRAPHS --
Annual change in component of state population
For the second consecutive quarter, Victoria has attracted the largest number of net interstate migrants. This title has historically gone to Queensland and more recently Western Australia, however the slowdown in the resources sector has stymied the interstate flow of residents into both of these states. Over the December quarter there were an additional 2,106 new residents from other states that chose to reside in Victoria which is an all-time record for the state. Interstate migration flows remained positive in Queensland (+6,897 over the year) and Western Australia (+4,800), while every other state and territory recorded a net outflow of residents to other states.
The rate of natural increase across each of the states is also quite different. The upwards trend in the level of natural increase is strongest in WA where the natural increase in residents was 4.4% higher than a year ago. The ACT also showed a substantial rise in natural increase, up 4.3% compared with a year ago. The regions that have seen a decline in the rate of natural increase are Victoria (down 7.0%), Northern Territory (-5.0%), Tasmania (-3.1%) and Queensland (-2.1%).
With population growth winding down we can expect some further easing of housing demand, both from a sales and a rental perspective. The slowdown seems to be most pronounced in the mining states of WA and Qld where population growth conditions have previously been the strongest.
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Economic data flows remains mixed but is generally more positive than negative
- Headline inflation increased by 0.6% over the March 2014 quarter and is recorded at an annual rate of 2.9% and core inflation is at 2.6%.
- The Australian economy grew by 3.5% over the 12 months to March 2014.
- Households savings levels are trending lower and were recorded at 9.7% in March 2014.
- No change was made to official interest rates by the RBA at their June board meeting with no change to interest rates in 10 months.
- The unemployment rate was steady at 5.8% in April 2014 but up from 5.6% at the same time in 2013.
- Consumer confidence has been trending lower since September 2013 and in May it fell to 92.9 points, its lowest level since August 2011.
- The total number of first home buyer finance commitments in March 2014 had fallen by -0.8% year-on-year with first home buyers accounting for 12.6% of all owner occupier finance commitments.
- Overall owner occupier housing finance (ex-refi’s) have increased by 5.4% year-on-year while refinance commitments are up 11.6% year-on-year.
- The value of finance commitments for investment purposes is 27.9% higher year-on-year to March 2014 and investors account for 39.1% of all finance commitments, sitting at a level close to their highest proportion since October 2003.
- Private sector housing credit has grown by 6.1% over the 12 months to April 2014, its highest annual rate of growth since May 2011.
- Dwelling approvals were 1.1% higher year-on-year in April 2014. The annual number of dwelling approvals is 16.5% higher over the year and at its highest level since the 12 months to January 1995.
- Population growth over the 12 months to September 2013 increased by 1.8% of 405,446 persons.
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At a slow rate over the past year, but not at a fast enough pace to result in any increase in yields
- Capital city house rents have increased by 2.2% over the year to May 2014 compared to a 2.8% increase in unit rents, both of which are well below value growth figures over the year.
- Gross rental yields for houses have fallen from 4.2% a year ago to 3.9% currently while unit yields have decreased to 4.7% from 5.0% a year ago.
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Although sales volumes for houses and units are higher than they were at the same time last year, growth in transaction numbers has started the year off at a slower pace than what was experienced throughout the final quarter of 2013.
The first quarter of each year typically sees a lower volume of sales than the other three quarters, this is largely due to the fact that housing market activity slows throughout most of January and sometimes well into February. Given this, it’s not necessarily best to compare sales between quarters because the housing market acts very differently in each period however, comparing to the same quarter in previous years does provide insight into the comparative performance of the market.
As you would anticipate, across individual capital city markets the annual change in sales is quite varied depending on the cities stage in the property cycle. Brisbane and Adelaide, which to-date have seen relatively limited value growth, have actually recorded the greatest annual rise in sales up 21.1% and 10.8% respectively. On the other hand, Perth and Canberra have recorded falls in sales over the year, down -8.2% and -4.2% respectively.
Looking at the capital city variations between houses and units the pick-up in sales activity year-on-year has been greater for houses (7.9%) than it has been for units (1.2%). Over the first 3 months of this year, house sales were higher than in the same period last year across each city except for Perth (-5.9%) and Darwin (-6.0%). Focussing on unit sales, sales are lower over the first quarter in Sydney (-1.7%), Perth (-17.6%) and Canberra (-23.9%).
There has historically been a strong correlation between sales volumes and property values. If demand is greater and more homes are selling the likelihood is that values will rise. Alternatively, if fewer buyers are active in the market selling conditions become tougher and values fall. The fourth chart highlights this correlation clearly.
Over recent years, when the number of homes sales across Australia’s capital cities edge below 80,000 on a quarterly basis, values are typically rising by a quarterly rate of less than 2.0%. When quarterly sales fall to 70,000 you find that this is generally a trigger point for values to start falling. It is important to note that March sales volumes data indicates that although sales are higher than they were a year ago, sales activity isn’t as strong as it was at the end of 2013.
With the quarterly rate of home value growth having most recently peaked in September 2013 and quarterly sales having peaked shortly thereafter in November, it will be interesting to watch what happens to sales and values from here. According to the RP Data-Rismark Home Value Index, capital city home values fell by -1.9% in May 2014. Although this is likely to be largely a seasonal influence on the reading, with quarterly value growth having peaked and sales volumes tapering, will volumes continue to ease and value growth continue to moderate? Alternatively, will the second half of the year see a rebound in both sales and values much like occurred over the second half of 2013?
Of course we don’t know, however what we do know is that last year values rose by 3.0% over the first six months of 2013 followed by a 6.6% capital gain over the second half. With interest rates set to remain low it may provide enough stimuli to see values start climbing more rapidly once more. Our belief is that the strong growth we saw late in 2013 and early 2014 have peaked and although values are likely to keep rising, they will most likely do so at a more moderate pace. This is largely due to affordability constraints becoming more prevalent in the market and both lower returns and capital growth potential for the investors that have been so active in the market. Consumer sentiment, which have been trending lower since September last year, is also likely to impact on any substantial rebound in home value growth.
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