CoreLogic’s April housing market review reveals Sydney’s property market is in a good position.
Sydney’s property market certainly remains strong with the annual pace of capital gains reaching a new cyclical high in March.
This continued growth has been caused by a combination of increasing housing demand as well as strong investment in NSW.
However, CoreLogic has also pointed to a few policy announcements made by ASIC and APRA aimed at reducing the number of high risk loans in the marketplace. These changes may result in the slowing of the market in the future.
We’ve included their video below along with a transcript.
Welcome to CoreLogic housing market update for April 2017.
Capital gain conditions across the housing market have continued to gather pace with CoreLogic reporting capital city home values rose by a further 1.4% in March to be 3.5% higher over the first quarter of the year and 12.9% higher over the past 12 months.
The annual rate of growth was the highest since May 2010.
Dwelling values have been surging higher since the middle of 2016 when the cash rate was lowered by 50 basis points and investment demand started to rebound after slowing through most of 2015 in the first half of 2016.
While the resurgence of capital gains is mostly evident in Melbourne and Sydney, where the annual rate of capital growth has jumped to almost 19% in Sydney and 16% in Melbourne, the smaller markets of Canberra and Hobart are also seeing some acceleration the rate of value growth.
Adelaide and Brisbane continue to record more sustainable growth conditions while dwelling values have continued to trend lower in Perth and Darwin on both a quarterly and an annual basis.
There are plenty of reasons why the Sydney and Melbourne housing markets are showing such substantially higher rates of capital gain compared with the other markets.
However, the broad factors relate to the high rate of population growth in these cities as well as the strong jobs market which is reflective of the buoyant services sector and also the construction sector, as well as the large number of investors that are adding to housing demand in these cities.
Sydney Housing Market Overview
Over the past 12 months, New South Wales and Victoria have accounted for just over two-thirds of the nation’s population growth.
The long-term average suggests a normal share of population growth in these two states is about 51%.
So, strong population growth is a significant contributor to the housing demand.
The past five years have seen this New South Wales and Victoria comprise about three-quarters of the national number of jobs being created as well.
The long-term average is substantially lower at about 55%.
Finally, investment across New South Wales and to a lesser extent in Victoria is substantially higher than in other states.
Based on January data from the Australian Bureau of Statistics investors were responsible for almost 60% of housing commitments excluding refinanced loans across New South Wales and 46% of loans in Victoria.
The annual pace of capital gains in Sydney reached a new cyclical high in March with dwelling values surging 18.9% higher.
The gain in house values almost breached the 20% mark over the past twelve months increasing by 19.7% while unit values were up by 15.3%.
While such a high rate of capital gains is creating significant wealth for homeowners, affordability constraints are now becoming severe with first home buyers at record low rates of participation in the market.
Renters aren’t facing anywhere near the same upwards pressure with weekly rents increasing by only one point four percent over the past twelve months.
APRA & ASIC Lending Regulations
The latest housing market results have been accompanied by new policy announcements from the Prudential regulator (APRA) and the Australian Securities and Investments Commission (ASIC) aimed at reducing the amount of new loans being originated on interest only repayment terms.
The APRA policy requires Australian lenders to reduce the proportion of new residential loan applications for interest only loans from the current rate of almost 40% to no more than 30%.
Additionally, lenders are required to ensure their serviceability metrics including interest rate and net income buffers are set to appropriate levels and that lenders continue to restrain lending to higher risk segments of their portfolios such as high loan to income lending, high loan to valuation ratios and loans over very long terms.
The existing 10% spend limit on annual growth and investment credit remains unchanged.
Further to these announcements, ASIC has also said they’ll be undertaking surveillance to examine whether lenders and mortgage brokers are inappropriately recommending more expensive interest-only loans.
These policies are likely to dent investment demand in the housing market however when taken in context with other market disincentives, there is the potential that investment exuberance could slow down more sharply.
Investors are already paying a 40 basis point premium on their mortgage rates and this could increase further if APRA requires lenders to hold more capital against their residential mortgages.
Additionally, rental yields are falling to new record lows each month which indicates that dwelling values are out of balance with rents.
Dwelling value growth is also out of balance with income growth.
The most extreme example is in Sydney where the latest estimates from the ANU Centre for Social Research and Methods, shows that household incomes are rising at about 4.6% per annum in Sydney while dwelling values are almost 19% higher over the same period.
In fact, over the past five years, city dwelling values are 75% higher compared with the 25% rise in household incomes.
With investors comprising slightly more than 48% of mortgage demand nationally (that’s excluding refinance loans) and almost 60% of mortgage demand in Sydney, less participation from this very large segment of the market has the potential to take a lot of the heat out of the housing market.
Regulators are likely to be mindful of the timing of an investor slow down though, and will probably be careful not to dial back investor demand too swiftly.
The unprecedented level of new unit supply that’s currently under construction is highly reliant on investors being able to settle their off-the-plan contracts.
Settlement risk is already heightened across some key inner city unit markets and a further tightening of investment lending policies has the potential to create some challenges for the hundred and fifty thousand or so units that will be transitioning from the construction phase to settlement.
If investment participation does trend lower we should expect the pace of capital gains to respond to the diminishment of demand.
The Growth Cycle
The growth cycle has been running for almost five years and it’s rare for housing markets to experience such a long and strong growth cycle.
In isolation, the additional lending policies are likely to have a relatively minor effect on housing market conditions.
However, when they’re viewed in conjunction with the affordability constraints, the low rental yields and rising mortgage rates as well as against a backdrop of record low wages growth and record high levels of household debt.
It’s looking more like the housing market is approaching a peak.
If you’re interested in keeping up to date with the housing market, check out our regular reporting at