Warning to all investors: capital city growth slows further

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Growth in capital cities markets is moderating as the year goes on, as illustrated by the latest RP Data - Rismark home value index results.

Over the month ending May 31, there was an overall fall of 1.9% in capital city dwelling values. This was the first month-on-month fall since May 2013.

Across most of the individual capital cities, dwelling values were also down over the month. Melbourne recorded the biggest fall with a 3.6% decline in values. 

While capital city dwelling values were up 0.7% over the past three months, this was the lowest rolling quarterly rate since the three months ending June 2013.

RP Data research director Tim Lawless said the month-on-month fall was partly due to seasonality, but could also indicate a broader trend towards cooler housing market conditions.

“Outside of the seasonality factor, we have been seeing signs that the housing market is approaching the peak of the growth cycle. The rolling quarterly rate of growth peaked in August last year and we have been seeing weaker auction clearance rates since late February.”

With affordability becoming more challenging, along with compressed rental yields in both Sydney and Melbourne, Lawless said it wouldn’t be surprising if the growth trend moderated further over the year.

Values in Sydney’s housing market have increased by 21.1% since May 2012, but rental rates have only increased by 6.3% in that time.

Likewise in the Melbourne market, values have increased by 12.3%, but rents have only increased by 4.3%.
This means there has been a substantial compression in rental yields across both cities. The gross yield on a typical Melbourne house is now just 3.4%, while in Sydney it is slightly higher at 3.8%.

Lawless said that such a low gross yield environment suggested that investors were focused on prospects for capital growth rather than rental income.

However, he said investors should be wary of such low yields as they indicated dwelling values are too high relative to rents.

“If value growth continues to moderate in these low yielding markets, recent investors will be left holding a low yielding asset without a great deal of capital growth upside over the coming years.”

Currently, investor risk was very much concentrated within the Sydney and Melbourne markets where there has been the most investor activity, Lawless warned.

RP Data - Rismark index highlights over the three months to May 2014:
 
  • Best performing capital city: Darwin – up 5.5%
  • Weakest performing capital city: Melbourne – down 1.9%
  • Highest rental yields: Darwin houses with gross rental yield of 5.8% and Darwin units at 5.8%
  • Lowest rental yields: Melbourne houses with gross rental yield of 3.4% and Melbourne units at 4.4%
  • Most expensive city: Sydney with a median dwelling price of $678,500
  • Most affordable city: Hobart with a median dwelling price of $345,000

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