CoreLogic’s May housing market review this month reveals that while borrowing to buy property is becoming more difficult than ever, the property in Australia’s highest growth city is finally starting to slow down.
On top of interest rates rising and the rates of capital gain slowing, APRA are tightening up their policies on interest-only lending, which makes for rather grim prospects for property investors.
However, this is just a snapshot of the larger picture and only the coming months will give a better indication of where the market is headed.
We’ve included their video below along with a transcript.
Welcome to Core Logic’s housing market update for May 2017
The latest set of housing market indices showed a cooling in the rate of capital gain during April with Core Logic’s combined capital index slowing from growth of around 1.2% per month over the first quarter to just 0.1% over the month of April.
While the result demonstrates a stark slowdown in the pace of capital gains we need to remember this is just one month of data. So, it will be important to monitor the data flows to see this recent softening develops into a sustained trend of cooling housing market conditions.
If the coming months do show a similar softer negative result, it’s likely to be a firm indication that the housing market is moving through the peak of what’s been a very strong and sustained cycle of growth.
The soft April reading was mostly due to a slowdown in the performance of the hottest markets. City-dwelling values were unchanged in April and Melbourne returned a gain at 0.5%.
Both cities showed remarkably flatter results than what we’ve seen over recent months. While the softer results hinted a slowdown in the housing market other indicators are also suggesting April may have been a slower month for housing.
Transaction volumes are falling
Transaction volumes fell in April however this can at least partially be attributed to seasonal factors like Easter the school holidays and the Anzac Day long weekend. Transactions were also lower than at the same period a year ago, across most regions.
Another factor that can help to explain low transaction numbers that slow down and mortgage-related activity.
CoreLogic valuation platforms recorded the lowest number of events per working day since July last year. Considering Core Logic platforms account for more than 95% of banking sector valuation instructions, the activity that flows across them provides virtually a real-time indicator of mortgage demand.
The slowdown and mortgage-related activity could also be partially seasonal which is why we look at an activity-based measure that’s on the number of working days in a month.
Mortgage rates are rising
But there’s also the fact that mortgage rates have been rising since August last year. According to the latest RBA data, the average discounted variable mortgage rate for investor loans has shifted 25 basis points higher since August last year which is the equivalent to a typical RBA rate hike.
The three of fixed rate investor loans is now 30 basis points higher and discounted variable rates for owner-occupiers have also shifted 10 basis points higher since August.
With household debt levels at record highs, it makes sense that households will be more sensitive to the cost of debt.
For investors, this sensitivity is compounded by the fact that rental yields are record lows in Sydney and Melbourne and have trended lower across the other capital cities as well.
The new policies are hurting investors
On top of rising mortgage rates at the end of March 2017, APRA announced further macro-prudential measures which mandated the banks couldn’t originate more than 30% of new mortgages on interest only terms.
This new policy setting is likely to have the effect of pushing mortgage rates higher despite a stable cash rate and acting as a further disincentive for investors participating in a housing market.
A slowdown in investment activity will inherently impact those markets where investors are more active than others specifically these measures are likely to dampen demand in the Sydney market with latest data shows investors comprise 57% of new mortgage demand across New South Wales and Melbourne where investors comprise 46% of new mortgage demand across the state of Victoria.
Growth in Sydney is finally slowing down
The Sydney housing market took a breather in April from what’s been a dramatic growth run over the past five years.
Dwelling values were virtually unchanged over the month recording a monthly movement of negative 0.4%. Sydney house values get stayed a slight rise over the month which pushed the quarterly growth rate to 4.5%. However, unit values were 1.2% lower over the month.
Up until recently the pace of capital gains has been relatively even across Sydney’s house and unit sector. However, a recently stronger performance in the detached housing sector has pushed house values 17.4% higher over the past 12 months compared with a 9.8% rise in unit values.
Potentially the increase in unit supply is starting to weigh down the rate of capital gains in this sector a trend is very much become embedded across the Melbourne and Brisbane housing markets.
In summary, the Australian housing market is potentially moving through an inflection point caused by a range of factors.
While it may be too early to call the peak in the market the coming months will provide a clear indication as to whether the slowdown we saw in April with the result of seasonal factors or was at the start of a more sustained trend characterised by lower or even negative rates of capital gain.
The factors contributing to weaker growth include worsening housing affordability rising mortgage rates and tighter lending policies from APRA, as well as lenders.
What this means for housing affordability
On the housing affordability front, Core Logics latest indicators show housing affordability based on a dwelling price to income ratio has never been this tough.
Using December data, the national measure shows the median dwelling price is now 7.2 times higher than the median annual gross household income. Ranging from a ratio of 8.4 times in Sydney to 4.5 times a Darwin.
Alternatively, mortgage serviceability measures aren’t quite as challenging thanks to the very low mortgage rate setting. The typical Australian household is dedicating 30.5% of their annual gross household income to service an 80% loan devaluation ratio mortgage.
This measure was substantially higher in 2008 prior to interest rates falling. At this time the same serviceability measures showed households needed to dedicate 51% of the gross annual household income to service a mortgage.
These two contrasting methods for measuring affordability highlight that one of the biggest hurdles for housing affordability is simply getting a foot in the door. With deposit hurdles becoming almost insurmountable challenge for some buyers, due to the fact that incomes have risen at a far lower rate than housing prices.
Add to that, the cost of purchasing such as stamp duty conveyancing and inspections and it becomes clear why first-time buyers are such a small component of the marketplace in regions like Sydney.
Despite a stable cash rate since the latest cut in August last year, mortgage rates have been nudging higher. Investor rates of 25 basis points higher on variable loans and a 30 basis points higher on fixed rate loans.
Higher mortgage rates coupled with rental yields around record low levels and strict servicing criteria from lenders is a recipe to slow down investment demand.
Add to this, this the latest round of APRA regulation which will make it harder to secure an interest-only loan and probably place further upward pressure on mortgage rates and it’s looking more likely that the housing market will be sliding further over the coming months.
The next few months will make for interesting analysis.
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