The great property halt

Australia’s housing market changed direction in June 2010. Capital growth actually ground to a halt on the back of seventeen months of consecutive gains.

Based on the RP Data-Rismark Home Value Indices, over the eighteen months to June 2010 the combined capital cities of Australia saw home values increase by 18.5% after values fell by 3.8% during 2008.

Over the three months ending October, capital city home values were virtually flat (+0.3% seasonally adjusted) indicating a soft landing as the market left the growth phase of 2009/10.

The cause for slower property market conditions is due to a number of factors with the most significant of them being higher interest rates.

From October 2009 to November 2010 the Reserve Bank increased rates by 175 basis points. The market was also affected by the First Home Owners’ Grant boost which was halved in October 2009. By January 2010 the boost was completely removed.

Additionally, a general wind-down in the market cycle was at play. The high rates of capital growth between January 2009 and June 2010 could not have been sustained – as interest rates rose, affordability constraints became a greater barrier and buyer demand began to fall.

For 2011, we are likely to see vendor expectations change as slower market conditions come into play. The outcome will be that houses will take longer to sell and buyers will be negotiating much harder than they were in 2009 and the first half of 2010.

A variety of indicators are now suggesting that market conditions will continue to transition in favour of buyers. The average time it takes to sell a house across the capital cities has increased from 38 days in October 2009 to 49 days in October 2010 and the average level of vendor discounting has increased from 4.7% to 5.5% over the year to October 2010.

Auction clearance rates across the combined capitals are now averaging in the low to mid 50% range as seller and buyer expectations diverge. The low rate of clearance suggests that vendors will have to become more flexible in their price expectations if they want to make a sale. These factors provide the best indicator that buyers are becoming more empowered and vendors are losing some of their leverage in the market.

Despite the fact that the Australian housing market has moved out of the growth phase, it is not likely to result in any material declines in home values. The base level fundamentals remain very strong.

The good news for the coming year is that Australia continues to record strong population growth. Overseas migration to Australia appears to have peaked, however total population growth remains well above average and the rate of population growth (1.8% per annum ) is among the highest of any OECD nation.

Such a high rate of population growth will continue to create a high level of demand for Australian housing. Coupled with this, as a nation, Australia is building too few dwellings. The undersupply of housing is not likely to be corrected any time soon despite the recent peak in population growth.

Strong economic conditions and consumer confidence are also likely to underpin the Australian housing market. The unemployment rate, at 5.2% in November 2010, is trending downwards towards ‘full’ employment and Australia’s economy is projected to grow by more than 3% during 2011. Both factors will be a strong influence of consumer confidence which is likely to remain high during 2011.

While capital growth is trending out of the housing market, rental rates are starting to show some upwards pressure. Weekly rents softened during 2009 as a large number of renters decided to take advantage of the historically low interest rates and Government incentives, and purchase a home rather than rent.

Since peaking in mid-2009, first home buyers have fallen back to about 15% of the overall owner occupier market. The fall away in first time buyer numbers is now being reflected in increased rental demand that is starting to cause rents to move upwards again.

Over 2011 it is likely that rental growth will at least move back to the historic average of between 6 and 8% year on year. That’s great news for investors, but not so great for renters.

The improving rental market is also likely to see rental yields improving for investors. As capital gains outpaced rental markets in 2009 and the first half of 2010, rental yields were sharply eroded. We are now seeing the first signs of yield improvement which is likely to provide a further encouragement for investors looking to strategically position themselves in the market.

In summary, the Australian housing market is likely to remain reasonably steady over the coming year. If historic performance is anything to go by, the post-boom period between 2004 and the end of 2006 saw Australian capital city home values increase by just 4% over the entire two year period. At that time unemployment was similar to what it is now and the economy was on the cusp of a resources boom that fuelled economic prosperity.

Factors such as higher interest rates and housing affordability will continue to dampen market conditions. In balance, the Australian economy which is characterised by robust economic growth and a labour market approaching capacity which will fuel wages growth, which will continue to underpin demand for housing both from a rental and purchase perspective.

The Best of the Best tables provide a summary of the top 10 suburbs within each category based on the 12 month period ending September 2010. Only those suburbs that have recorded at least 20 transactions over the 12 month period have been included in the analysis. The tables are divided between houses and units and provide the top ten performers nationally and for each capital city across the following tables:

• Highest median prices
• Most affordable median prices
• Most affordable median prices within 10km of the capital city
• Highest indicative gross rental yields
• Highest indicative gross rental yields within 10km of the capital city
• Highest increase in median selling price over the 12 month period
• Highest median weekly rental rates
• Most affordable median rental rates
• Highest gross value of sales

See RP Data’s Best of the Best Suburb here.

Tim Lawless is the Director of Property Research at RP Data.