CoreLogic: The April 2017 Home Value Index Results Are In

Dwelling values increased by 0.1% across the combined capital cities in April, with housing market conditions slowing in both Sydney and Melbourne, according to CoreLogic.

“The two hottest housing markets in the nation have shown signs of slowing down in April, with the CoreLogic Hedonic Home Value Index recording a rise of just 0.1% over April, the lowest month-on-month rise in capital city dwelling values since December 2015," Head of CoreLogic Research Tim Lawless said.

“The moderation in growth was due largely to a slightly negative April result in Australia’s largest capital city housing market, Sydney, where dwelling values were broadly flat (rounded up from - 0.04%) over the month.

"The result for Melbourne was also lower than previous months of 2017, with dwelling values up 0.5% over the month.”
Softer results after dramatic capital gains
The softer results across Australia’s two largest capital cities comes after dramatic capital gains were recorded over the second half of 2016 and the first three months of 2017. Between July 2016 and the end of March 2017, Sydney dwelling values surged 11.3%, whilst Melbourne values increased slightly more at 12.6% in the same period.

The April results mark the weakest monthly change in dwelling values across the Sydney market since December 2015, when CoreLogic reported a 1.2% fall in Sydney dwelling values; the soft reading comes after dwelling values have risen by 75.1% over the past five years, an annual rate of growth of 15% over this period.

Most other capital cities also recorded softer growth conditions in April than for the first three months of 2017.
Hobart Strongest Performer
Based on the rolling quarterly change in dwelling values, the strongest housing market is currently in Hobart, where home values have risen 5.1% over the past three months.

Hobart’s housing market has staged a solid improvement over the past two years and is now the third best performing capital city on an annual basis, with dwelling values moving almost 14% higher over the past twelve months alone.
Caution in calling peak in market
“We need to be cautious in calling a peak in the market after only one month of soft results," Mr Lawless said.

“April, in particular, coincides with seasonal factors including Easter, school holidays and ANZAC day long weekend. The softer results should also be viewed against a backdrop of an ever evolving regulatory landscapes which is firmly aimed at slowing investment and interest-only mortgage lending.

"Testament to this is mortgage rates which have been edging higher, particularly for investors and interest-only loans, as well as rental yields which have been hovering around record lows," he said.

"The higher cost of debt, as well as stricter lending and servicing criteria, has likely dented investment demand over recent months.

“In a city like Sydney, where more than 50% of new mortgage demand has been from investors, a tighter lending environment for investment purposes has the potential to impact housing demand more than other cities,” he said.

The latest housing finance data from the Australian Bureau of Statistics (ABS) showed that investors comprised 57% of new mortgage demand in New South Wales, excluding refinanced loans.

This is substantially higher than the national average of 48%, or Victoria, where new mortgage commitments for investors comprised 46% of the market.

With value growth easing and weekly rents showing some subtle appreciation, gross yields held reasonably firm over the month. Across the combined capitals, the typical gross yield on a house is equal to the record low set last month at 3.0%, while the gross yield on capital city units has edged higher, rising from 3.9% in March to 4.0% in April.

The largest capital cities continued to show the lowest rental yields.

Sydney and Melbourne both recorded a gross yield of 2.7% for detached houses in April. Across the unit sector, the Darwin market is showing the lowest gross yield profile at 3.7%, followed closely by Sydney and 3.8% and Melbourne at 4.1%.

“If the softer capital gains result seen in April develops into a trend of weaker growth, the likelihood is that yields will stabilise at their current low levels and gradually start to rise if rental growth begins to outpace value growth," Mr Lawless said.

"Other factors pointing towards a subtle weakening of the market during April have been a trend towards lower clearance rates and higher listing numbers. These indicators have edged higher relative to a year ago in some cities, including Sydney.”

While clearance rates finished the month on a strong footing and remain well above the long-term average, the weighted average clearance rate across the combined capital cities trended lower during April, slipping below 70% over the third week of the month. This was the first time the clearance rate fell below 70% in three months.

Importantly, the preliminary auction clearance rate over the last week of April rebounded back to 76.9%, suggesting vendors are still enjoying strong selling conditions.
Number of listings edged higher compared to April 2016
The number of property listings relative to a year ago has also edged higher in several cities including Sydney. The last time Sydney listing numbers increased year-on-year was early September 2016.

“If stock levels continue to rise, the benefit to buyers is more choice and vendors may find their selling position is not as strong as what it was over the past year or so," Mr Lawless
Valuation activity eases in April
Activity across the CoreLogic mortgage valuation platforms eased during April, with the CoreLogic Mortgage Index down from a historically high reading in March.

“Monitoring the trend in mortgage-related valuation events through May and June should give a clearer indication about whether lending activity has been dampened by the recent regulatory changes, as well as the impact of higher mortgage rates announced by financial institutions throughout March and April," Mr Lawless said.

CoreLogic mortgage platforms track mortgage-related activity, accounting for more than 95% of lender valuation events, including refinancing. The index shows a strong correlation with the ABS housing finance data, indicating mortgage demand has remained strong over the first quarter of the year.

“Overall, the softer housing market results for April are but one month of data," Mr Lawless said.

"Monitoring of the data flows over the coming months will provide firm evidence as whether this latest housing market reading develops into a softening trend.

“With mortgage rates remaining well below the long-term average, we should see a continuation of support for the housing market and investment demand.

"On the flipside, this current growth phase has been running for almost five years across Sydney and Melbourne; it is rare for an upswing in the cycle to be sustained for this long and at such high growth rates," he said.

“Affordability constraints are very much evident across Sydney, and to a lesser extent Melbourne which would be progressively impacting on housing demand.

"Additionally, investment related demand is likely to ease due to the changed regulatory environment and tighter lending and servicing policies from the banking sector.”

At the same time, housing affordability is likely to be one of the key themes of the Federal Budget to be announced on May 9 and the NSW Government Budget to be announced in late June, either or both of which could reasonably be expected to have some impact on the housing market in the months ahead.