Cash cow capitals – will city gains continue in 2015?

14th Jan 2015By: Tim Lawless

The housing market finished the 2014 calendar year with dwelling values up 7.9%; a strong result, but lower than what was recorded over the previous year when capital city dwelling values rose by 8.9%. While there has been a lot of debate around the rate of appreciation across Australia’s housing market, the actual trend has been one of tapering capital gains.

Growth in dwelling values across the combined capital cities peaked in April last year at 11.5% on a rolling annual basis. Since that time the annual rate of capital gain has been moderating, as some momentum leaves the market.

The slowdown in capital gains has been most noticeable in Perth, Darwin and Canberra where housing market conditions have weakened. Canberra was the only capital city where dwelling values slipped lower over the 2014 calendar year, down by 0.6%. In Perth, the annual rate of capital gain peaked at the end of 2013 at 9.9% – by the end of 2014, dwelling values were up by just 2.1% over the year. Similarly in Darwin, the annual rate of dwelling value growth peaked at 9.7% early last year before ending the year with home values up just 1.6%.

The moderation in housing market conditions hasn’t been confined to just Perth, Darwin and Canberra. Every capital city, apart from Hobart and Adelaide, has lost some momentum in the rate of capital gains.

Sydney, where capital gains have been the highest of any capital, has seen the annual rate of growth peak at 16.7% in April last year. By the end of the year, value growth had slowed to 12.4% – still the highest annual gain for dwelling values across the capital cities – but the rate of growth is clearly losing some steam.

In Melbourne, we have seen the rate of growth fall from a recent peak of 11.9% in January last year to 7.6% by the year’s end.

The slowdown hasn’t been quite as obvious in Brisbane, where the market reached a recent annual growth rate peak of 7.0% in June last year before finishing the calendar year with values 4.8% higher.

Where to from here?

We are still expecting home values to broadly rise in 2015, however we would be surprised if the rate of growth was equal to, or higher than, what was recorded over 2014. While interest rates are set to remain low and potentially even move lower, that stimulus is likely to be offset by ongoing low levels of consumer confidence and soft labour markets.

Affordability pressures are also becoming increasingly obvious, particularly in the Sydney market where the median house price at the end of the year was recorded at $858,000.

Investment demand in the housing market is also likely to moderate over the coming year due to the low rental yield profile of our capital city housing markets as well as the tightening of credit availability for investment purposes from Australia’s banking sector. The banking sector is likely to impose stricter lending criteria across the investment sector after recent statements on investment lending from both APRA and the Reserve Bank of Australia.

The latest housing finance data for November 2014 showed a 2.2% fall in investor finance commitments over the month. Although we don’t expect that magnitude of falls to continue, we do expect an ongoing moderation in investment demand given stricter criteria for this type of lending coming into place. Owner-occupier demand is already easing and should demand from both sectors ease in unison (as we expect), then growth in home values is also likely to continue to slow.