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March 2014 – Market Update

Home prices surge higher, Melbourne  leads the way
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Home prices have surged in March in a sign that the boom in the property  market is continuing after a pause in February, just days after the Reserve Bank  warned borrowers and banks against property speculation. Prices surged by 2.3 per cent last month over Australia’s eight capital cities to take the total growth for the first quarter to 3.5 per cent, new  figures released by RP Data and Rismark today showed.

Melbourne's real estate market set the pace for Australian capital cities.
Melbourne’s real estate market set the pace for Australian capital cities.  Photo: Craig Abraham

“Half of all Australia’s capital cities are now posting record-high dwelling  values, with Sydney’s housing market showing the most substantial increase  beyond its previous market high,” RP Data research director Tim Lawless  said.

Melbourne  recorded the strongest growth, with prices soaring by 5.4 per cent  in  the first three months of this year. Sydney grew by 4.4 per cent for the   quarter while Hobart prices strengthened by 4.7 per cent.

Surging gains

Over a million people on low incomes experiencing housing, with a whopping 30 percent of their income accounting for housing costs.
March madness: Home prices surged across the board in Australia’s capital  cities. Photo: Louie Douvis

Mr Lawless said a few factors were driving up Melbourne prices, including the  popularity of the city’s properties with investors and stock levels remaining  “relatively slim,” except in Southbank and Docklands.

“There’s also the fact that we’ve seen the Melbourne market place introducing  a lot more new housing supply, which of course would be affecting greater sales  as well. Melbourne doesn’t have the same affordability constraints as Sydney is  showing because it has a lot of relatively new housing supply released in the  outer fringes.”

Mr Lawless said while the Melbourne market has showed a lot of momentum and  consistently high capital gains, rental yields were “now extraordinarily low”,  with houses posting a gross return of just 3.3 per cent.

Brisbane  rose by 1.5 per cent, Adelaide by 1.2 per cent and Darwin by 2.8  per  cent and Canberra by 2 per cent. Perth bucked the trend, with prices   falling by 0.6 per cent since the start of this year.

“Based on today’s RP Data Rismark results, dwelling values have risen by  a cumulative 15.8 per cent since the growth cycle commenced in June 2012,”  RP Data said in a statement.

“Dwelling values increased by just 2.9 per cent over the first twelve  months of the cycle, however, since last June, values are up by close to 13  per cent.”RBA warns on speculation

The strengthening property market amid the record-low level of interest rates  has led the Reserve Bank of Australia to step up its rhetoric on its concerns  about rising prices. Some commentators have said that the sharp rise in prices  could lead to a housing bubble.

The RBA governor Glenn Stevens as well as other central bank officials have  warned borrowers that home prices could rise as well as fall.

The surge in investors, include foreign buyers, has also priced first-home  buyers out of the property market. The proportion of first-home buyers  remained depressed but edged up slightly to 13.2 per cent in January, above  November’s record low of 12.3 per cent, the Australian Bureau of Statistics  reported last month.

Rismark’s managing director, Ben Skilbeck, said March was a traditionally  strong month for home prices, and that the increases were not surprising given  the high auction clearance rates and the lack of any major economic changes.

Mr Lawless added that the surge in prices was caused by Melbourne and  Sydney.

“That growth is very much confined to two capital cities. It’s really Sydney  and Melbourne that’s driving that very high level of growth. Every other capital  city is showing a more measured rate of capital gain,” he said.

“I think if there is any danger of the market place overheating, you can  point the finger at Melbourne firstly and secondly at Sydney, and yields are a  really good sign of that disparity.”

UBS economist George Tharenou said while the strengthening trend in the  housing market “may well be making the RBA a bit ‘nervous’ about how long it can  sustain record low rates”, the central bank would be limited in tightening  monetary policy as that could push the Australian dollar higher and stifle  growth in other non-mining sectors of the economy.

The Reserve Bank is widely expected to keep the cash rate on hold at a record  low of 2.5 per cent today, after easing rates by 225 points since November  2011. The growth in the housing market has in part been fuelled by the low  interest-rate environment.

Will strong growth continue?

Mr Lawless said he would be “very surprised” if the current rate of  growth in house prices is sustained over the medium to long-term.

“I think there are some natural barriers to prevent the housing market from  continuing to see this pace of growth. The first is simply affordability.  Sydney’s median house price is now $713,000. So inherently you have that natural  price barrier that will start to slow the market down,” Mr Lawless said.

“And I think the second factor that will start to slow the market down is the  fact that investors will simply be turned off the market place that’s yielding  so low.

“Nobody wants to buy into the market place at a very mature end of the growth  cycle and have limited prospects for capital gain at the same time as have a  very low yield. That seems to me to be the situation in Sydney and Melbourne at  the moment.”