Housing Affordability: Baby Boomers vs. Gen Y

From On The House. Few owner occupiers today, nor many owner occupiers in 1989, could enjoy stress free and affordable weekly mortgage repayments. Lack of affordability is not so much a generational problem as it is a socio-economic problem.

Inter-generational arguments over affordability have again become salient in the media. Characterisations of moaning millennials were made by economist Stephen Koukoulas, prompting a response from young writer Osman Faruqi that baby boomers should choke on my soy flat white.

Confusion around the severity of housing affordability arises because dwelling prices change daily, yet the institutional papers and ABS data we look to are retrospective.

The Submission to the Inquiry into Home Ownership by the Reserve Bank of Australia in June 2015 explored ownership rates as a possible proxy for understanding the severity of housing affordability, and whether expensive housing was keeping young people out of the market. However, the home ownership rates referenced are only measured to 2012 – before the enormous housing boom of 2013 – and therefore the submission paper does not take into account the largest and longest housing boom we have seen in over 30 years.

Graph 2 shows the House Price Index for Australia’s eastern metropolitan markets over time. The increase in the HPI from 2013 (particularly in Sydney and other east coast markets) marks an unprecedented rate of growth in dwelling values.

Graph 2: House Price Index

Source: Onthehouse.com.au

Housing affordability is an undeniable problem in Australia today. It is measured using the ‘median multiple’, which is a measure employed by the World Bank. It is found by dividing median dwelling prices by gross annual median household income. An indicator of 5.1 or more is considered to be highly unaffordable.

We only have median household income data at a capital city level, up to 2012. To get a more accurate figure, I have indexed income by changes in average weekly earnings so I could work out the median multiples for each capital city. With the exception of Canberra, the median multiple is well above 5.1. In Sydney it is currently about 13.

The Interest Rate Debate

One of Koukoulas’ main arguments was that low interest rates have made it easier for young people to take out money to afford a home. He argues that baby boomers struggled with interest rates of over 17% in the 1980s.

While I don’t deny Koukoulas’ latter statement, it is important to get a better understanding of what low interest rates actually do to affordability.

Economics literature shows Australian’s have a high elasticity of demand for houses. This means that the more money people have access to, the more likely they are to buy houses. Low interest rates make the cost of borrowing money cheaper and access to money easier.

When interest rates are low, the cost of housing is bid up higher because more people are competing for housing. Graph 3 demonstrates the inverse relationship between interest rates and Australian median house values.

Graph 3: Interest Rates and Median House Values in Australia

Source: Onthehouse.com.au & ABS

Low interest rates have not worked in the favour of first home buyers. In fact, in 2014, for the first time in recorded history and while the cash rate was at historic lows, more money was lent to people who were buying investment housing compared to people who were buying something to live in (see Graph 4). This unusual phenomenon eased shortly after APRA placed higher risk weights and investment lending restrictions on banks, however it does show that owner occupiers, some of which are first home buyers, do not necessarily benefit from low interest rates.

Graph 4: Loans to Investors vs. Owner Occupiers

Source: Onthehouse.com.au & ABS

Home owners also faced high unaffordability in the late 1980s when interest rates increased sharply and average home loans peaked at 17%. The cost of loans became extremely high and some were forced to sell their home or take on multiple jobs in an attempt to pay off their rapidly growing debt. On top of this, house prices fell, which left some people with mortgage debt even after they lost their home.

ABS data shows that the average loan size of owner occupiers in NSW over the 1980s was approximately $80,000, while the average interest rate increased to 17% in 1989. Assuming a 30 year mortgage on $80,000 taken out in 1989, the total repayments work out to be around $263 per week, at a time when the average person across NSW was earning between $359 and $620 a week depending on their job status and sex . The $263 home loan assumption represents between 73% and 42% of average weekly earnings at the time.

Today, standard home loan rates are at approximately 5.35%. In February 2016, the average loan size taken out by owner occupiers in NSW was $416,000 . With the same loan assumptions as above, weekly repayments work out at approximately $536 per week. In November 2015, the average weekly earnings across NSW ranged between $951 and $1,712, depending on labour force status and sex, making repayments between 56% and 31% of average weekly earnings.

This analysis is fairly ‘back of the envelope’, but looking at these numbers suggests that few owner occupiers today, nor many owner occupiers in 1989, could enjoy stress free and affordable weekly mortgage repayments – which is considered to be no more that 30% of income. Exorbitant home loan repayments persist 25 years on, but for different reasons. A surge in interest rates overwhelmed young home owners in 1989, whereas today many young people are lucky to overcome the deposit hurdle due to enormous dwelling prices. In the case of owner occupiers today, this is with the ‘benefit’ of low interest rates.

Ambiguity still exists in this comparison, for many reasons. For example, average weekly earnings is looking at individuals rather than households. Young people in the 1980s were more likely to have formed double income households than young people today. 1989 was a different world to 2016, particularly in terms of the nature of the economy, technology, job vacancies and the terms of employment.

However, a lack of affordability is not so much a generational problem as it is a socio-economic problem. Years of analysis could be done trying to understand ‘who had it tougher’, but this seems like a waste of energy. Low income households and single parent families will face tougher challenges than members of Generation Y who are in high income brackets.

House Prices On The Slide

According to the Domain House Price Report for the March Quarter, Melbourne and Hobart are the only capital cities where house prices are still rising. Sydney’s house prices fell, recording a quarter-on-quarter drop of 1.5 per cent, bringing the median down under the $1 million mark to $995,804. This 1.5 per cent drop when coupled with the 3.2 per cent fall in the December quarter, means prices have now dropped 4.7 per cent over six months. It’s an even bigger drop than Sydney experienced over 2008 during the global financial crisis, when the median dropped 4.6 per cent over the full year.

Domain-April-2016-Sydney Canberra house prices fell by 1.4 per cent after five consecutive quarters of growth.

In Perth, house prices dropped by 1.3 per cent to $579,914 over the quarter, while Adelaide recorded a 0.5 per cent drop to $491,422, and prices in Brisbane fell by 0.05 per cent to $512,809.

The report showed that house prices in Hobart surged during the March quarter, rising by 4.3 per cent to $360,212, while Melbourne house prices rose by 1.2 per cent to $726,962.

Darwin house prices dropped sharply by 4.9 per cent to $610,305.

“Weakening economic activity and growing uncertainty is impacting fragile consumer and investment sentiment, leading to falling house and unit prices in most capital cities,” Domain chief economist Andrew Wilson said.

“The outlook for house prices remains subdued, with capital city growth likely to continue to track at best just above the inflation rate for the remainder of 2016.

“The prospect of weaker house price growth, however, will be welcomed by prospective first home buyers still struggling to get into the market.”

The boom’s over, but no crash is imminent. As Dr Wilson points out, the most recent drop in Sydney is less than the one in December. So there could be an even smaller fall in June. It’s not as if there’s been any major trigger to substantiate a more significant correction, like a large rise in interest rates or a jump in unemployment.

Further Confirmation Australian Home Prices Least Affordable

The latest Economist data on global house prices released today, shows Australia sitting at the top the pack (excluding Hong Kong) in terms of average prices to average income. This chart shows Australia, Britain, Canada and USA trends from 1990. This is consistent with findings from Demographia.

Economist-HP1On a different measure, prices against rent, Australia is behind Canada, but above the other two.  Rental growth in Australia has not kept up with house prices.


Prices in real terms show Australia price growth just behind Britain, but well ahead of Canada and USA.


Finally using the price index, movements in Australia are close to those in Britain, but well ahead of Canada and USA.


Explanation from the Economist

Their interactive chart uses five different measures
• House-price index: rebased to 100 at a selected date
• Prices in real terms: rebased to 100 for the selected date and deflated by consumer prices
• Prices against average income: compares house prices against average disposable income per person, where 100 is equal to the long-run average of the relationship
• Prices against rents: compares house prices against housing rents, where 100 is equal to the long-run average of the relationship
• Percentage change: the percentage change in real house prices between two selected dates

The data presented are quarterly, often aggregated from monthly indices. When comparing data across countries, the interactive chart will only display the range of dates available for all the countries selected

Annual rate of housing market capital gains slips to slowest pace in 31 months – CoreLogic RP Data

The rate of value growth continued to moderate as housing market conditions cool in Sydney and Melbourne, whilst the remaining capital cities recorded a range of outcomes from small value increases to moderate declines according to CoreLogic RP Data.

During March, capital city dwelling values recorded a subtle lift, rising by 0.2 per cent to take capital city home values 1.6 per cent higher over the first quarter of 2016. The quarterly increase in home values was broad based across the nation’s capitals, with Perth (-0.9%) and Brisbane (-0.1%) the only two cities to record negative movements in dwelling values over the past three months.

CoreLogic RP Data Head of Research Tim Lawless said, “The March quarter rise in capital city dwelling values is in stark contrast to the first quarter of 2015, when values increased by 3.0 per cent, which is almost double the current pace of quarterly growth. However, compared with the final quarter of 2015, when capital city dwelling values were down 1.4 per cent, the housing market has shown a modest rebound in growth which is well below the strong capital gains recorded over the first half of 2015.”

“The annual pace of home value appreciation across Australia’s capital cities highlights the slowing growth trend,” he said.

Following the March results, the annual rate of capital growth across the capital cities has now reached its lowest point in 31 months, with dwelling values rising by 6.4 per cent over the past twelve months across the combined capitals. Furthermore, no Australian capital city has recorded an annual growth rate in the double digits over the past twelve months. Melbourne remains the capital city with the strongest annual growth, with dwelling values increasing by 9.8 per cent over the past twelve months.

Mr Lawless said, “The housing market has been losing momentum since July last year, when capital city dwelling values were increasing at the annual rate of 11.1%.”

Index results as at March 31, 2016


Perth and Darwin are the only two capital cities where home values are trending lower on an annual basis, down 2.0 per cent and 1.8 per cent respectively. However, Mr Lawless noted the moderation in the rate of capital growth in the Sydney market has been the most pronounced, with annual dwelling value growth more than halving to 7.4 per cent per annum, from a high of 18.4 per cent per annum in July last year.

The Melbourne market has been much more resilient, with annual growth in dwelling values slipping below the 10 per cent mark for the first time since May last year, to reach 9.8 per cent at the end of March 2016.

The current growth cycle has been running since values troughed in May 2012. Through to March 2016, capital city dwelling values have risen by a cumulative 32.2 per cent. Over the cycle to date, Sydney home values have seen the most significant level of appreciation, with dwelling values 49.2 per cent higher since values started rising, followed by Melbourne at 35.7 per cent cumulative growth.

Darwin and Perth moved through their respective cyclical market peaks more than a year ago, with Darwin home values peaking in May 2014, whilst Perth’s housing market peaked in December 2014. Since then, both Darwin and Perth home values have fallen by a total of 4.6 per cent.

Value of Capital City Markets

From Onthehouse.

Historically, it is common that the February quarter sees subdued growth that is below the long term average, however it is unusual to see a negative result. Quarterly growth in the Australian house market was -0.04% overall in February, while the unit market suffered a loss of -0.32%

Of the 32 major housing markets, 18 slipped into negative growth for the quarter. Of the markets that achieved positive quarterly growth, it was mostly subdued rates of less than 1%.

Interestingly, Sydney, Melbourne and Brisbane saw a reduction in median house values in the February quarter. This is likely the result of tightened access to home loans, which has encouraged a more rapid onset of the downswing in the east coast markets.

Melbourne’s growth cycles typically see two or three growth surges during the upswing stage, so this quarter’s retraction could just be a short term fluctuation.

The greatest capital losses for the quarter were again seen in Darwin, where the median house value dropped -5.68% and units declined -5.02%.

The key to this market is recalling its small size. Sales volumes across the Darwin market (houses and units) dropped 23% for the year, however the change in the number of sales was a decline of just 469.

Surprisingly, house and unit values in country Tasmania achieved the highest quarterly capital growth rates. The median houses value increased by 2.68% in the February quarter, while units went up by 2.00% in the same time period.

To put the various housing markets in perspective, Figure 1 shows the estimated dollar value of each capital city residential real estate market as at February 2016. This was achieved by using the average sale price of houses and units in the year to February 2016, multiplied by the number of sales in the metropolitan regions for the year.

Figure 1: Value of Capital City Markets

Source: Onthehouse.com.au

Noting the small size of Darwin’s housing market – a hundredth of the value of Hobart’s housing market – enables understanding of the high growth fluctuations occurring in Darwin. Because the market is so small, big projects and investments have a large impact on the economy, population and subsequent demand for housing.

Dwelling values stage a broad based rise in February

According to the February 2016 CoreLogic RP Data Hedonic Home Value Index results released today, dwelling values across Australia’s combined capital cities showed a 0.5% rise in February, pushing dwelling values 1.4% higher over the past three months.

In February, home values rose across each capital city with the exclusion of Perth and Canberra. Over the past three months, dwelling values have increased across all capitals except Sydney (-0.2%). The largest monthly increases in home values were recorded in the cities that have been underperforming over the growth cycle to date; Hobart dwelling values were 2.9% higher, Adelaide showed a 1.9% rise, and Brisbane home values increased by 1.8%. Perth and Canberra were the only cities to record a monthly fall in values, down -1.1% and -0.2% respectively.

Index results as at February 29, 2016


Sydney was the only capital city to have recorded a fall in dwelling values over the past three months, down -0.2%. The cities to record the greatest value rises over the past three months have been: Hobart (8.5%), Melbourne (3.8%) and Brisbane (2.0%). According to CoreLogic RP Data head of research Tim Lawless, “Even though home values have trended lower over the year in Perth and Darwin, they have recorded value rises of 0.2% and 0.3% respectively over the past three months.”

Dwelling values are still increasing across most capital cities however, the results remain diverse. Sydney and Melbourne remain the strongest markets in trend terms, however, the gap is widening between the performances of Melbourne relative to Sydney.

Over the past 12 months, combined capital city home values have increased by 7.6%, with the annual rate of growth down from a recent peak of 11.1% recorded in July last year. Melbourne has maintained its number one growth position, with annual capital gains of 11.1%. Mr Lawless said, “Melbourne values appear to be holding reasonably firm since December last year with the annual rate of capital gain virtually level over the past three months.”

Sydney’s annual rate of growth has continued to moderate, having almost halved from its cyclical peak of 18.4% recorded in July last year to reach 9.5% growth over the past twelve months. Despite the slowing trend, Sydney remains the second best performing capital city over the past twelve months, however, Mr Lawless said, “a few of the smaller cities, where growth rates have recently accelerated, may start to rival Sydney’s position over the coming months.”

“The trend in home value growth is showing signs of increasing in those markets that have previously underperformed. These include Brisbane, Adelaide, Hobart and Canberra. Affordability constraints aren’t as apparent in these cities and rental yields haven’t been compressed to the same extent as what they have in Melbourne or Sydney. Home values increased in Brisbane by 5.5% over the past year, which is the fastest annual rate of value growth in a year. In Hobart, home values are 6.2% higher over the year, which is its fastest annual rate of home value growth since July 2010,” Mr Lawless said.

Here’s what David Cameron could learn from a history of social housing

From The Conversation.

There’s a housing crisis engulfing the UK, and London is at its epicentre. In his recent vow to regenerate over 100 so-called “sink estates”, David Cameron would have us understand that public housing has failed: that the result is poor people, living in poorly designed homes, that were poorly managed. But this version of history is not definitive – nor even particularly accurate.

So what can history tell us about what works and what doesn’t, when it comes to housing? As planners and politicians cast about for solutions to the current crisis, the answer may well be found at their feet – or rather, under them.

In 1892, parliament realised that the building of the Blackwall Tunnel would require hundreds of homes to be demolished. This resulted in a new act of parliament, which stated that no work could commence on the tunnel until those evicted had been rehoused. And so, with private builders unable to supply these new homes, the first council housing in London was built.

But while the new estates sheltered those displaced by construction, their rent was still relatively expensive, so the nation’s poor and vulnerable remained in the private rented sector. So-called “slum landlords” routinely exploited the high demand for housing, leaving vulnerable tenants with substandard and overcrowded accommodation.

The pioneers of housing philanthropy – Joseph Rowntree, George Peabody and Octavia Hill, to name a few – battled to tackle poor housing conditions, homelessness and poverty. But it was often difficult to attract the required support from investors for philanthropic housing projects, when the alternative profits from being a slum landlord were so high.

Meanwhile, the government’s view was that – whatever the solution to the urban housing crisis may be – it most certainly was not state-owned housing. The parallels with 2016 are obvious.

Search for solutions

But all that rapidly changed in the first half of the 20th century – particularly following World War I and World War II – as successive governments took greater responsibility for the social welfare of citizens. Building programmes were supported by government grants and subsidies, which allowed rents to drop below market levels and made housing available to lower income households.

The vision of Anuerin Bevan – a key architect of the NHS – was that council housing, owned and managed by local authorities and built to a high standard, would be home to a diverse range of social classes. Bevan’s vision was not achieved in its entirety: some architectural design and building materials did not meet the needs of residents. Even so, by the 1960s, more than 500,000 flats had been added to the housing stock in London alone.

Worse for wear. sarflondondunc, CC BY-NC-ND

From the late 1970s, council housing was seen as increasingly problematic. As well as an ideological shift away from state provision, the government had concerns about the cost of maintaining council-owned houses, and the higher concentration of poor and vulnerable citizens living in them. It appeared that the 20th century’s use of council housing to provide accommodation for lower income households would not be a 21st-century solution.

Instead, the Thatcher government’s Right to Buy policy for council tenants sought to cement the UK as a nation of home owners. As well as being sold off, council housing stock was transferred to housing associations or arms length management organisations. Together with housing cooperatives and mutuals, these new arrangements became known as “social housing” and “registered social landlords”.

The idea was that housing associations would be able to borrow on the markets to invest in their housing stock – making them less dependent on government funding – and that tenants would have a strong influence about housing management decisions. Tenant participation was certainly strengthened in all forms of social housing, particularly where associations were local and community-based. Greater private investment was also secured to enhance housing quality.

Yesterday’s issues today

In 2010, the coalition government began referring to “registered providers of housing”, dropping the “social” altogether. That said, it should be noted that in other countries in the UK, housing policy has moved in different directions since the issue was devolved to the governments of Scotland, Northern Ireland and Wales.

Now, the Conservative government is introducing the Right to Buy for housing association tenants, as well as implementing fixed-term tenancies and the policy that tenants on higher incomes should pay more rent or leave. This all sounds like the final death knell for mixed income, long-term and secure public housing. In its place comes “affordable housing” – a term which is stretched to describe homes costing up to £450,000.

The current housing crisis is displacing lower income families from many parts of our cities. Young people have much worse housing prospects than their parents. Recent research says that in less than ten years time, only the rich will own their homes. And new cases of slum landlords have been reported in London. It is 2016 but, when it comes to housing, in many ways it could actually be 1891.

The key difference now is that we can look to the past for lessons. We have learned that private developers and landlords cannot be the entire solution. We know how to deliver very large scale housing programmes in periods of debt and austerity. And we can do so again now – while avoiding the pitfalls – with a diversity of social housing models and new roles for private developers, landlords and investors.

Author: John Flint, Professor of Town and Regional Planning, University of Sheffield

How policy success, not failure, has driven Australia’s housing crisis

From The Conversation.

To see Australia’s shortage of affordable housing as a failure of government is to misunderstand the politics that underpin housing. The vast proportion of government money spent on housing directly benefits the well-off at the expense of private renters and public housing tenants.

Government policy has not, on the whole, failed. It has been a huge success insofar as protecting the opportunities for speculative investment and profit for homeowners and private landlords.

If the government was serious in wanting to end the housing crisis it would need to invest in new social housing and pursue measures that choke off, via tax reform, the opportunities for profiteering currently enjoyed by landlords and homeowners.

The pursuit of these options would be bitterly opposed – not least by many homeowners and property investors, as it would lead to a fall in house prices.

Why this misdiagnosis persists

The government’s current housing response can be viewed as a charade. Ministers have been able to convince many that the government is working hard to put in place measures to fix the problems faced by low-income households.

There are two discernible ways that the government has maintained this charade. The first is by permeating an impression that action will be forthcoming. Social Services Minister Christian Porter recently announced that he would be establishing a working group to explore ways to improve the availability of affordable housing.

Porter’s working party should come as no surprise. Over many years, governments have undertaken many reviewsandenquiries.

Second is the recycling of a set of myths. Among these is that public housing is a failed policy that reinforces welfare dependency and that state and territory planners impose arbitrary rules and regulations that impede new housing development.

Public housing and planning regulation are framed as dysfunctional. We are told that affordable housing would be built quickly if the commercial sector were not impeded by bureaucratic demands.

Should we discard statements from the government that effective reforms are underway and recognise that the prospects for low-income Australians will deteriorate over the coming years? Already there are as many as 105,000 people who are without a home and 160,000 households on public housing waiting lists. The overall stock of public housing had fallen from 331,000 units in 2007-08 to 317,000 in 2013-14.

The Productivity Commission estimated that the proportion of low-income households in housing stress – that is, those that pay more than 30% of their income on housing-related costs – increased from 35% in 2007-08 to 42% in 2013-14.

In its 2012 report, the former National Housing Supply Council highlighted that between 2002 and 2012 rents increased in nominal terms by 76% for houses and 92% for flats. And the median value of a home in Australia is now A$576,100.

Sticking to the script

There are already signs in 2016 that the government intends on sticking to the usual script – one that frames the affordability crisis as stemming from a shortage of land, excessive red tape, and high labour costs within the building industry.

Acting Cities Minister Greg Hunt recently identified:

Three critical elements that require government attention. One – land release. Two – the cost of building – and this is in particular in relation to the inner city apartments where there is an urban infill. The third is bureaucracy.

Hunt’s attribution of the causes of the housing affordability crisis are broadly in line with the pronouncements of finance, developer and real estate lobbyists. All have made similar claims and work tirelessly to safeguard the opportunities for profit-making that exist when housing is in short supply.

It is no coincidence that supply-side interventions, such as sustained investment in public housing, have been eschewed in favour of demand-based subsidies. The latter includes initiatives such as Commonwealth Rental Assistance and inputted tax subsidies that enable landlords to boost their profits, alongside first homeowner grants and the exemption of capital gains tax for owner-occupiers when they sell their home. This amounted to A$54 billion of revenue forgone in 2016.

For those who wish to reap profits from their housing investment, there are good reasons to maintain the status quo; for a shortage of supply to continue and for public housing to remain a stigmatised tenure only available for those without any recourse elsewhere.

Stressing land release as a significant cause of the affordability crisis is misleading but not surprising. This is the claim repeated by developers who wish to increase their profits. It is not uncommon for developers to delay development plans on land they have acquired on the expectation that the opportunity to secure greater profits will accrue when the land value increases at a later stage.

It is disappointing that Hunt offered such a myopic explanation of the housing affordability crisis. A more insightful analysis would attend to the failure to invest in public housing, the subsidies that distort the private rental market such as negative gearing, and the tax privileges that are extended to homeowners.

The housing problems experienced by low-income households are a symptom of entrenched inequality within Australia. Public and private tenants remain disadvantaged and have to endure problematic tenancies that are increasingly insecure. Unless this inequality is addressed, Australia’s housing problems will endure.

Author: Keith Jacobs,  Professor of Sociology and ARC Future Fellow, University of Tasmania

Melbourne takes over as the best performing capital city over the past twelve months – CoreLogic RP Data

Dwelling values across Australia’s capital cities were 0.9% higher in January driven partially by a rebound in Sydney and Melbourne.  The recent growth conditions have pushed the Melbourne market into first place for annual growth in dwelling values with an 11.0% rise compared with Sydney where values are 10.5% higher over the past twelve months.

According to the January 2016 CoreLogic RP Data Hedonic Home Value Index results released today, dwelling values across Australia’s combined capital cities showed a 0.9 per cent rise in January after recording no change in December and a 1.5 per cent drop in November.

According to CoreLogic RP Data head of research Tim Lawless, this month on month rise wasn’t quite enough to pull the rolling quarterly rate of growth back into the black, with capital city dwelling values remaining 0.6% lower over the past three months. Hobart led the monthly figures with a 4.7% jump in values, followed by Melbourne where values were 2.5% higher and Canberra with a 2.8% lift. Sydney values also showed a rise of 0.5%, while the remaining four capital cities showed dwelling values to be either flat or down.

Index results as at January 31, 2016


The rolling quarterly trend was looking similarly diverse, with four of Australia’s eight capital cities recording negative dwelling value movements over the past three months, with Sydney dwelling values showing the largest fall, down 2.1 per cent. Values are down over the rolling quarter in Darwin (-1.4%), Adelaide (-0.9%) and Melbourne (-0.1%) as well. The strongest growth in home values over the quarter across the capital cities was found in Hobart with a 3.0% capital gain.

Despite recording the largest annual decline in home values (-4.1%), Perth dwelling values posted a 1.7 per cent rise over the three months to the end of January. Other capital cities to record a rise over the rolling quarter were Brisbane (+0.8%) and Canberra (+1.2%).
Over the past twelve months, capital city dwelling values have risen by 7.4% with Sydney’s capital gains of 10.5% no longer the highest annual rate across the capitals. “While still a high rate of annual growth, Sydney’s annual rate of capital gain is now at a 29 month low and has been progressively softening since peaking at 18.4% in July last year,” Mr Lawless said.

“Melbourne’s housing market has been more resilient to slowing growth conditions which has propelled the annual growth rate to the highest of any capital city, with dwelling values 11.0% higher over the past twelve months. Previously, during the height of the growth phase, there was a large separation between Sydney’s housing market, which was streaking ahead, and Melbourne’s, where the rate of capital gain was substantial but still well below the heights being recorded in Sydney. The latest data reveals Sydney’s housing market is now playing second fiddle to Melbourne’s, at least in annual growth terms.”

“In fact, over the past six months, the performance gap between Sydney and Melbourne is stark. Sydney dwelling values have reduced by 0.6 per cent between July last year and the end of January 2016, compared with a 3.0 per cent rise across Melbourne dwelling values. The last six months have also seen both Brisbane and Canberra dwelling values rise by 2.0 per cent while Hobart values are 1.3 per cent higher and Adelaide dwelling values have been virtually flat with a 0.1 per cent rise,” Mr Lawless said.

The annual pace of growth across the Canberra market has been progressively improving, with values up 6.0% over the past twelve months; the strongest annual gain since November 2010. The nation’s capital has benefitted from improved buyer confidence while rising demand has seen much of the housing oversupply absorbed, particularly across the detached housing market where gains have been the highest.

While the pace of growth in dwelling values across the combined capitals has eased from the heights of mid last year, rental growth across the capital cities over the past twelve months has reduced further, with dwelling rents unchanged over the year.

According to Mr Lawless, with a rental series that extends back to 1996, these are the weakest rental markets conditions ever seen. “In fact there hasn’t previously been a twelve month period when rents didn’t rise across our combined capitals index.” he says.

Darwin and Perth are dragging the broader capital cities’ rental indicators down with weekly rents down 13.4% over the past year in Darwin and 8.6% lower in Perth. Dwelling rents were also down in Brisbane (-0.7%) and Adelaide (-0.4%). The largest rental increases were in Sydney and Melbourne where weekly rents rose 1.4% higher, and 2.1% higher respectively over the past twelve months.

Mr Lawless said, “With dwelling values rising substantially more than rents in Sydney and Melbourne, this ongoing effect has created a compression in gross rental yields to the extent that gross yields in these cities are now only marginally higher than record lows.”

According to the most recent Reserve Bank’s private sector housing credit data, the pace of investment-related credit growth has fallen well below the 10% speed limit implemented by APRA in December 2014.

Mr Lawless said, “The slower pace of investment credit is likely to be due to more than just higher mortgage rates for investment loans and stricter lending policies, but also due to investors becoming wary of the low rental yield scenario while also anticipating lower capital gains than what was recorded last year.”

“As housing market activity moves out of its seasonally slow festive period, we are likely to have a much better gauge on how the overall housing market is performing in the New Year.

“January tends to be a relatively quiet month across the housing market, however across the capital cities we estimate that there were approximately 16,500 dwelling sales contracted in January.

“Additionally, while the number of auctions won’t return to normal until early February, the weighted average auction clearance rate across the capital cities over the final weekend of January was 61.6%; higher than what was recorded during December when the weighted average clearance rate was between 57% and 59% from week to week.

“The bounce in dwelling values in January may provide an early sign that housing values across the combined capital cities are not likely to experience material decreases in 2016. We believe that the rate of capital gain across the combined capitals in 2016 is likely to be less than the 7.8% experienced in 2015, driven by a slowdown in Sydney and Melbourne and continued softness in the Perth and Darwin markets,” Mr Lawless said.

RBNZ Highlights Unprecedented Divergence in House Prices

The Reserve Bank NZ, released a Bulletin today which looks at house price trends across New Zealand. Since mid-2012, Auckland house prices have increased 52 percent, but house prices in the rest of New Zealand have increased only 11 percent. The extent of this divergence is unprecedented.

Since 1981, house prices in Auckland have increased much more than those in the rest of New Zealand. House prices in North Island provinces – where house prices have grown the least – are only 63 percent higher than they were in 1981. By contrast, Auckland house prices are 352 percent higher.

Figure 14 shows Auckland house prices as a ratio to those in the rest of New Zealand. High average rates of house price inflation in Auckland relative to the rest of the country have seen this ratio trend upwards since 1981. The extent of the increase in this ratio since 2009 is unprecedented.

RBNZ-House-PricesAn upward trend in this ratio might be expected over time, but it is not clear how steep that trend should be, whether it is time-varying, or whether it will persist. Notwithstanding that uncertainty, the ratio is currently 22 percent above a simple filtered trend. A divergence of this magnitude is also evident when Auckland is compared with urban centres only. This means that the upward trend has not been driven by a more general divergence between house prices in urban and provincial centres, but is an Auckland-specific phenomenon.

In previous instances when the ratio has increased relatively quickly – namely, during the late 1980s and mid-1990s – this has subsequently been followed by a period of lower growth. In 1987, house prices in Auckland increased while they were flat in the rest of the country. Then in subsequent years, Auckland house prices fell while those in the rest of New Zealand continued increasing. In the upswing of the 1990s, Auckland house prices increased relative to the rest of the country, and stayed elevated until the latter part of the 2000s cycle, at which time house prices in the rest of the country increased at a faster pace than those in Auckland.

DFA believes that the same forces are at work here, as in Sydney, London and other metro centres. Lack of supply, high levels of finance available, investors active, foreign investors active, and weak regulatory control. The perfect storm.