Overall capital growth in median value houses across Australia was 3.98% over the three months ending July, which was largely driven by strong growth in the metropolitan and regional markets in New South Wales, Victoria and the Australian Capital Territory. Hobart houses also performed well with an increase of 1.05% in the July quarter, however regional Tasmania suffered a sharp decline of 3.18%. Table 1 shows the latest Residex data to the month of July.
Table 1: July 2016 Summary
July saw even stronger performance in Australian units, as the median value increased 4.78%. Again, growth was largely driven by increases in New South Wales and Victoria.
The July statistics reflect analysis in previous months arguing the boom in Sydney is quickly easing. While quarterly growth in Sydney houses was strong, annual growth is at just 3.95%, the lowest annual growth rate since May 2013.
Simplified performance of the respective capital city dwelling markets can be seen when looking at a dwelling value index over the last 5 years. Using the median dwelling value for each of the capital city metropolitan regions, Graph 1 shows the respective performance of these cities over the last boom period by starting the index from July 2011. At each year following, the index represents by what factor the median dwelling has gone up by. In this case, the median Sydney dwelling is now approximately 1.5 times, or 150%, what it was worth 5 years ago.
The graph highlights that this enormous upswing in Sydney has led to milder increases in the other capital city markets, with the exception of Peth and Darwin following the end of the mining boom. While recent capital growth has been strong in Melbourne, Hobart and the ACT, Graph 1 shows that this growth comes off the back of losses in 2011, which partially accounts for the growth disparity between Sydney and the other south-east housing markets.
Graph 1: Capital City Indices – July 2011-16
Strong Rent Gains in Hobart Houses
The July statistics also reflect that rents are adjusting to increased growth and popularity in the south-east markets, which have recently benefitted from a spill-over of growth from Sydney. These markets are the ACT, parts of Tasmania, and country New South Wales.
Hobart houses saw the largest increase in dollar value rents for the year, of 8.57%. It is important to note that aside from Western Australia, Hobart houses also had the lowest rents of all capital city house markets, so slight increases in rent present as strong growth rates. Graph 2 shows the movement of capital growth of houses and rent in Hobart growth becoming more aligned.
Graph 2: Hobart Houses – Annual Dollar Rent Growth versus Annual Median Value Growth
Hobart house market and Australia wide house market rent growth is compared in Graph 3. Hobart rents have historically shown more volatility in growth than Australia wide rents. The last two years have also seen a distinct divergence between growth in Australia-wide and Hobart rents.
Graph 3: Growth in Median Rents – Hobart versus Australia Wide
In any case, these smaller markets such as Hobart and the ACT have historically followed the Sydney market at a lag. While some property markets in Australia are yielding low returns at their peak growth relative to Sydney and Melbourne, they are still strong relative to bonds, cash and stocks. In the current economic context, in which low growth rates are the ‘new normal’ in so many sectors, Australian assets and property become attractive.
Australia recently received an affirmed AAA credit rating from Moody’s, based on a GDP outlook of 2.7% growth for this financial year, despite the mining boom coming to an end more than four years ago when commodity prices peaked. In fact, while some housing markets have been correcting following the mining boom, there have been some bright spots in Australian commodity exports. Coal increased to an astonishing $90 per dry metric tonne in July, up from an average of $77 over the previous month. Liquefied natural gas projects are also moving into production, however the revenue and tax earnings from Australian LNG may not be as promising as first thought due to Australia contributing to a supply glut.
Standard and Poor’s has put Australia’s credit rating on negative watch due to a persistent budget deficit, and concerns that reliance on foreign capital exposes the Australian economy to risk. The Australian economy is performing well when compared with other OECD countries today, which is likely to attract further overseas capital. However, anyone comparing Australian indicators with their own history would see that current growth and jobs figures are weak.
Unemployment in Australia dropped to 5.7% in July from 5.8% in the previous month. However, growth in employment figures was driven by part-time employment. This is likely to keep wage inflation subdued, which may prompt a further rate cut this year. Australia’s part time employment rate was at a record high of over 30% at July 2016.
Assuming relatively strong returns in housing markets will continue to attract foreign investment in the short term, pressure will be on the Australian currency. This is because foreign investors buy assets with Australian dollars, driving demand for the AUD. This helps to create the appearance of growth, while putting pressure on the RBA to cut rates in order to bring down the dollar.
Market Analyst for Onthehouse.com.au.