The phenomenal growth in property values over the past few years continued to stabilise over July, new data has revealed.
CoreLogic’s latest national Home Value Index shows that Australian dwelling values fell by 1.3% overall in July, in a third consecutive monthly drop. After surging 28.6% through the pandemic growth phase, values are now 2.0% below April’s peak.
Five of the eight capital cities recorded a decline in July, led by Sydney and Melbourne where values fell 2.2% and 1.5% respectively. Brisbane also edged into negative growth territory for the first time since August 2020, with values down 0.8%, while Canberra (1.1%) and Hobart (1.5%) were also down over the month.
Perth (up 0.2%), Adelaide (0.4%) and Darwin (0.5%) remained in positive growth through July, however most of these markets have recorded a sharp slowdown in the pace of capital gains since the first interest rate hike in May.
CoreLogic’s Research Director Tim Lawless said housing market conditions are likely to worsen as interest rates surge higher through the remainder of the year, after which it is widely expected that interest rates might once again come down.
“The rate of growth in housing values was slowing well before interest rates started to rise, however, it’s abundantly clear markets have weakened quite sharply since the first rate rise on May 5”, he said.
“Although the housing market is only three months into a decline, the national Home Value Index shows that the rate of decline is comparable with the onset of the global financial crisis (GFC) in 2008, and the sharp downswing of the early 1980s. In Sydney, where the downturn has been particularly accelerated, we are seeing the sharpest value falls in almost 40 years.”
Regional markets have also weakened, with the combined regional index recording the first monthly decline (down 0.8%) since August 2020. Overall, however, regional markets are still outperforming their capital city counterparts, though this month’s figures show major regional centres are not immune to falling home values.
“Dwelling values across CoreLogic’s combined regionals index were up 41.1% from the pandemic trough to the June peak, compared with a 25.5% rise across the combined capitals index”, Lawless said.
“The stronger growth reflects a significant demographic shift towards commutable regional markets, which is likely to have some permanency as more workers take advantage of formalised hybrid employment arrangements.”
Unit values across the combined capitals are generally recording smaller falls relative to house values, down 1.0% and 1.5% in July respectively.
“This trend is most apparent across the three largest capitals as well as Canberra, where housing affordability challenges may be deflecting more demand towards the medium to high-density sector”, Lawless said.
“Additionally, firmer interest from investors should favour the unit market over houses where demand has historically been more concentrated.”
Lawless believes that as we move through winter towards spring, we are likely to see more focus on advertised stock levels.
“So far, the flow of new listings has followed the normal, seasonal pattern through winter, with the flow of new listings declining relative to the warmer months across most regions.
“Although new listings are higher than at the same time last year and previous five-year average, the flow of freshly advertised stock has fallen 21.4% from the mid-March peak, helping to keep overall inventory levels low.”
However, he warns this dynamic is likely to change through spring as the trend in new listings ramps up at a time when demand is likely to be lower.
In Sydney and Melbourne, total listings are already 8 to 10% above five-year averages, however Brisbane, Adelaide and Perth are recording advertised supply levels that are more than 30% below the five-year average, suggesting a faster rate of absorption through the growth cycle to-date.
On the demand side, CoreLogic’s estimate of sales activity over the three months to July was 16.0% lower relative to the same period in 2021. The national figures are heavily impacted Sydney and Melbourne, relative to the same period a year ago. Stronger markets such as Adelaide and Perth have recorded a rise in activity, with the estimated volume of sales up 21.6% and 7.2% respectively.
“It’s important to remember the context of these statistics”, Lawless said. “While national home sales are falling from record highs, they are still 9.2% above the previous five-year average for this time of the year.
Rents continued to trend higher through July, rising 0.9% nationally over the month to be 2.8% higher over the rolling quarter and 9.8% higher over the past 12 months.
The trend in rising rents is evident across each of the capital city and broad rest of state markets, led by Brisbane with a 4.2% rental rise over the three months to July, to a 0.3% rise across Regional NT.
“Rental markets are extremely tight, with vacancy rates around 1% or lower across many parts of Australia. The number of rental listings available nationally has dropped by a third compared to the five-year average, with no signs of a lift in rental supply. On top of already tight rental supply, it’s likely demand will continue to increase as overseas arrival numbers climb,” Mr Lawless said.
With rents rising faster than values, yields are consistently improving, albeit from record lows. Across the combined capital cities, the gross yield has increased from a record low of 2.96% in February 2022 to 3.20% in July.
With forecasts for the cash rate ranging from the mid 2% to the early 3% range, even the best case interest rate scenario indicates that variable mortgage rates will roughly double from their current level. For a household with a $750,000 mortgage, a cash rate of 2.5% implies a variable mortgage rate for a new buyer of 4.81%, adding around $1,011 per month to mortgage repayments relative to the record low rate setting prior to May 5. A cash rate of 3.5% would add approximately $1,477 per month to the cost of a $750,000 mortgage.
On a more positive note, Lawless believes that this interest rate hiking cycle may be short and sharp, with financial markets and some economic forecasters now factoring in interest rate cuts through the second half of next year.
“When interest rates start to stabilise, or potentially reduce next year, this could be the cue for housing values to find a floor”, Lawless said.
“Similar to the trajectory of the upswing, this downswing phase could be a short but sharp one, depending on how high and fast interest rate settings go”, he concluded.