What’s heating up the property market?

20th May 2015By: Cameron Kusher

Home value growth has begun to accelerate once again across Sydney and Melbourne while mortgage lending continues to surge. According to the CoreLogic RP Data Home Value Index results for April 2015, combined capital city home values have increased by 7.9% over the year, up from a 7.4% annual increase in March. The rebound in the annual rate of growth is being largely fuelled by Sydney and, to a lesser degree, Melbourne.

Home values in Sydney have increased by 14.5% over the past year. Although this is down from the recent peak in annual growth of 16.7% in April of last year, it has lifted from a recent low of 12.4% in December 2014. It is a similar story in Melbourne, where home values have increased by 6.9% over the year, down from a peak annual rate of growth of 11.9% in January 2014 but higher than the recent low of 5.6% in March 2015.

Low interest rates certainly play a part in fuelling the growth, but outside of the two largest cities, the rate of capital growth has been much more moderate. Brisbane has recorded the third greatest rate of annual increase at a tepid 2.2% (barely beating inflation). Given the disparate results, it is clear that it isn’t all about interest rates.

Growth in investment lending

One of the major drivers of the strength in growth of Sydney and Melbourne home values, has been the surge in investment lending. The latest housing finance data to March 2015 shows that investment housing finance commitments rose another 6.4% to be 20.9% higher over the year. At the combined capital city level, home values started to increase in this current phase from a low in May 2012. Over the current growth period, Sydney home values have increased by 40.2% and Melbourne by 24.5%. Meanwhile, from May 2012, the value of investment housing finance commitments to owner occupiers has increased by 38.6% compared to an 86.6% rise in investment lending.

If we look at the state-by state data it is proving to be a good proxy for what is happening in the capital cities. However, it should be noted this data is only available at this stage to February 2015. New South Wales accounted for 43.2% of all investment lending nationally in February 2015, with a further 25.2% in Victoria; Queensland had the next greatest proportion at 15.5%. In New South Wales, investors account for 45.8% of all housing finance commitments, or 59.0% if you exclude refinances. In Victoria, investors account for 37.2% of all lending and 47.9% of new lending. It is clear from the data that investors are showing a clear preference for investing in the Sydney and Melbourne housing markets.

No doubt this investment strategy is proving to be lucrative with low mortgage rates and is resulting in home value increases for home owners. Although the growth in values is much stronger in Sydney and Melbourne, these cities also have the lowest rental yield profile. While it is fine to focus on capital growth while it is strong, we would alert investors in these two cities that growth won’t remain strong forever and they should also pay some consideration to the current yield and the yield potential for their investment properties.