In the year to November 2016, Australian dwelling values saw an increase of 4.49%. This is above the 3.77% annual growth average since 2009, when Australia felt the effects of the 2008 GFC. However, growth was below the November 2015 figure of 6.63%.
Table 1: Residex Repeat Sales Statistical Summary – November Data
Hobart Houses Top Growth for November
Table 1 shows the repeat sale growth summary for the major Australian dwelling markets at November. The highest growth for the November quarter was in Hobart houses, where the median repeat sale value increased 2.39% in the last 3 months. Hobart houses also had the strongest growth of the major aggregate markets in 2016, with a 6.01% increase in the year to November.
While these figures are low relative to the double digit growth seen in 2014-15 (for example Sydney houses increased 15.71% in the year to November 2015), major Australian housing markets are likely to return to norms of single digit dwelling growth as softening economic conditions catch up with dwelling demand.
ACT houses increased in value over the quarter, and displayed a healthy return of 3.32% over the year. However, the Mr Fluffy buyback scheme continues to put pressure on this market, with high construction costs potentially inflating growth figures.
Major Queensland and South Australia markets remained flat over the quarter, though some markets outside of the capital cities pushed up regional growth figures.
Hobart dwelling values were expected to increase over 2016 as those priced out of the Sydney and Melbourne markets looked elsewhere for affordable capital growth strategies. The latest Residex State Market Report highlights the many benefits of the area, which include excellent agricultural produce, its popularity as a ‘staycation’ and international destination as the Australian dollar has fallen over the year, and its relative affordability.
It is important to keep in mind that Tasmania still has geographical challenges with freight costs and labour force limitations. However, interstate migration to the area may increase due to the aforementioned growth factors, which would also bring new skills and services the area.
Furthermore, as Hobart becomes more expensive due to higher interstate investment, and assuming that demand remains strong in 2017 (which it may not, given recent GDP indicators), spill-over of growth may occur in other parts of the island, such as the second largest city in Tasmania after Hobart – Launceston.
Launceston has some solid growth fundamentals, including tertiary education institutions, shopping outlets and beautiful historical buildings which promote tourism and dwelling demand for sought-after aesthetics. Already, 2016 has seen a 4.65% increase in Launceston house values and a 1.68% rise in unit values. Graph 1 shows the similarity in growth cycles across the two cities, though there was a slight growth divergence between the cities toward the end of 2013.
Graph 1: Residex Repeat Sales Index – Annual Growth
Expansionary Monetary Policy versus Dwelling Growth
Melbourne houses and units were also strong performers in the November quarter, with quarterly growth of 2.18% and 1.57% respectively. Despite persistently high prices, Sydney houses and units were not far behind, increasing 2.18% and 1.30%.
Sydney and Melbourne continued to be popular with investors as well as overseas and interstate migrants over 2016. According to ABS lending data from October this year, approximately 49% of new loans (excluding those for re-financing) were comprised of investors. Part of the resurgence in investor activity may be explained by expansionary monetary policy.
In September, Sydney dwellings experienced an uplift in annual capital growth – following the August rate cut decision – while Melbourne growth continued to ease. However, as the rate of capital gain across Melbourne has typically shown a slight lag on Sydney, Melbourne could also see growth rates pushed up in Q1 2017. These movements are displayed in Graph 2.
Graph 2: Target Cash Rate versus Residex Repeat Sales Index – Annual Growth
Hobart units were another stand out market over the October 2016 quarter, with capital growth of 4.72%. Growth has been driven by affordability and the increased popularity of Tasmania as a domestic and international tourism hub.
Around the latest cash rate decision in November, markets and commentators alluded to the idea that the cash rate was at the trough of its cycle, and the RBA would move to increase rates in 2017. This was partly because of the market confidence created around the expansionary policies of president elect Donald Trump. Despite no movement in the RBA cash rate since August, Australian lenders have recently started to lift their variable mortgage rates in response to higher international funding costs.
In any case, it could be that the anticipation of higher interest rates in 2017 created high investor demand for loans this quarter, while low interest rates can still be locked in for a period of time.
However, recent market indicators suggest the RBA is not in a position where it can begin to increase rates. September saw a seasonally adjusted decline in GDP of – 0.5% over the quarter, driven largely by a -0.52% fall in public investment. This marks one of the sharpest drops in GDP growth in 25 years.
In his delivery of the Mid-Year Fiscal and Economic Outlook, Treasurer Scott Morrison announced a reduction in the 2016-17 projected deficit from $37.1 billion to $36.5 billion, but the total deficit over the next three years would increase by $10.4 billion. Leading credit rating agencies maintained Australia’s AAA credit rating; maintaining good credit may see the government contain public expenditure even further.
Given the fragility of the Australian economy in labour and growth figures, a steady cash rate target may be expected over the first quarter of 2017. Despite low interest rates potentially slowing the downswing in Sydney and Melbourne, a decline in government expenditure and increased mortgage rates for investors from major banks may see a steady reduction in the rate of capital gain in these markets during 2017.
Market Analyst for Onthehouse.com.au.
Median growth statistics for this month are based on Residex monthly repeat sales indices. The repeat sales indices calculate capital gain based on properties that have resold during the period. Repeat sales measures exclude properties that have not sold previously, or where the attributes have changed between sales. Median values are based on non-revised figures, where the middle value when all the values are arranged in sequential order based on Residex AVM estimates at November 2016. Rental data is based on median advertised rental rates and sales data is based on settled sales received by Residex.