Hot or Not? The Australian housing market
The newspapers tell us that the residential real estate market is red hot. From weekend to weekend we hear of new record auction clearance rates and record prices. But is this the case for the whole market? On all measures the state housing markets are mixed. Lets have a quick look.
Residential real estate underpins Australia’s wealth. A simple comparison between the values of superannuation, Australian listed stocks and commercial real estate reveals residential real estate to be the clear front-runner, worth a whopping $5.0 trillion.
Annual changes in home value show a mixed bag. All capital cities except Hobart and Darwin have recorded an increase in home values over the last 12 months. The standout increases came from Sydney and Melbourne with 11.6% p.a and 7.8% p.a respectively, with the average at 7.9% p.a
Over the past three months home values have risen in four capital cities and fallen in the other four. The most surprising is the decline in Perth by -0.6%, but still maintained an annual increase of 6.9%. This may be an early sign of the slowing down in the WA economy and its mining boom.
From the last peak until October, Sydney is the only city to maintain positive value change. Hobart is the obvious outlier, experiencing a -15.2% decrease in value over the period. This significant deterioration can be attributed to the snail pace of growth in the Tasmanian economy.
Capital gains increasing, most of the time. It is evident in the upswing that housing market conditions have been improving since 2012. On a rolling quarterly basis, home values have increased over 10 of the past 12 months.
Capital growth across the most expensive suburbs is ramping up as value growth in the affordable areas slows. Over the past quarter, the most expensive suburbs have recorded value growth of 3.8%, compared to 3.4% across the middle market suburbs and 2.1% across the most affordable suburbs.
Capital gains for most cities were well above inflation over the decade. The average annual change in property value over the past 10 years was 4.3% p.a, with Perth and Darwin the standout cities with 7.7% p.a and 9.3% p.a respectively. Sydney was the laggard over the long term with a meager 2.7% p.a change.
Capital gains more subdued over last 5 years. The average growth in capital cities over the last 5 years was a more modest 3.8%: and Hobart saw negative value change at -1.8%. The clear exception to this story is Sydney, which saw a 5.6% increase in value.
Rental yields slowly eroding as value growth outpaces rental growth. Across capital cities, average rents sit at $477/week for houses, which is an increase of 3%. Rental growth is generally slowing across cities however, with only Sydney, Brisbane and Darwin experiencing positive rental growth over the past quarter. For all cities gross rental yields are currently recorded at 4.0%. Darwin has the strongest rental yields for houses at 6.2%, and Melbourne and Sydney have the softest with yields at 3.4% and 3.9% respectively. Yields in these cities are expected to decline further as values increase faster than rental growth.
National home sales are picking up. Over the three months to August sales were 17.6% higher compared with the three months to August 2012. Not only does this indicates some heat in the market, but also suggests buyers confidence is coming back.
Buyers are losing some leverage as homes sell faster. The average amount of days on the market has reduced from 56 days last year to 44 days this year.
Upswing in new listings, met with a decrease in total listings. New listings are 0.5% higher than at the same time last year, and 3.5% higher across capital cities. Total listings however are -3.7% lower than they were at same time last year, and -10.2% lower than last year across the capital cities. This suggests that the backlog of homes from last year has been sold.
Auction clearance rates are high, maintained by Sydney (79.2%) and Melbourne (73.1%). The clearance rate across all capital cities sits at 66.2% for 2013. This is a significant increase on the year before, when the rate sat at 50.4%.
New housing finance commitments are trending higher. However this remains well below the recent highs of 2009. Nonetheless, it indicates a fairly substantial uptick in housing finance.
The value of investment housing finance is approaching historic levels. The value of investor loans is up 25.5% year on year. This has increased investment finance commitments to 36.3% of the total value of all housing finance commitments, compared to 34.0% a year ago. The trajectory is clear.
Dwelling approvals are at their highest levels since July 2011. The annual number of approvals was 12.5% higher in September 2013 than in the same period last year, indicating an uptick in building activity. Interestingly, units rather than houses are driving this trend.
Private sector house and unit approvals are showing recovery. Unit approvals are up a staggering 31.9% year on year, with house approvals up 7.7% year on year. It is evident that this trend is a long way off reaching the last high of 2009, but is a positive sign of market activity.
The gap between housing supply and demand is widening. It is also clear that the increase in new dwelling approvals has been insufficient to meet demand set by population growth. This has been the case since the early 2000s but is even more pronounced since the high of 2009.
Compared to other international markets Australian homes values are not too high, not too low, but square in the middle. The US and UK housing markets have experienced significant decreases in value, while Canada and New Zealand currently at their peak. Australia is on an upward trend but remains in between the rest.
Conclusion
The statement that the Australian housing market is hot must be qualified. Based on house values, capital gains, rental yields it is apparent that all states are different. Sydney and Melbourne are breaking value and auction clearance records, while Darwin is leading on rental yields. All this means is that the Australian housing market is currently a very mixed bag.
