Aussie Property Market Slowdown is an Investor’s Nightmare

The Aussie property market continued its gradual decline, growing by just 0.2% in October. New CoreLogic figures show that combined capital city growth rising 10.1% year on year. That was down on the 11% increase in the year to September.

Meanwhile, rental yields fell to 3.4% in the year to October as well — the lowest rate in three years. It all adds up to a depressing market for investors. Before we look at why that is in closer detail, let’s stick with dwelling prices for the moment.

Adelaide and Canberra were the big winners in October. Dwelling prices across both cities went up by 1.5%. Hobart wasn’t far behind either, growing at 1.4%. Elsewhere however, the figures were less encouraging.

The property market in Perth remains a mess, with prices plunging 2.8% in October. Brisbane also fell by a modest 0.2%. And Darwin joined them as the only three cities in which price growth declined.

The big two, Sydney and Melbourne, sprung few surprises. Dwelling prices in the harbour city rose 0.3%. Meanwhile, Melbourne continued its recent superiority over Sydney, with prices up 0.6%. These figures are roughly in line with what we’ve seen these past three months.

During the October quarter, Sydney prices grew at an unspectacular 1.5%. That’s roughly half the rate at which prices have grown in Melbourne, at 3.1%. And it means the gap between the two leading markets is narrowing. At 12.8%, Melbourne is now edging closer to Sydney’s year to October 15.6% price growth.

What the October figures do suggest however is that prices are slowing. Considering how many things are weighing on prices, that shouldn’t come as any surprise.

The big banks have pushed up lending rates for both investors and owners. Lending standards in general have tightened. Investors are paying almost 0.30% more than what an owner occupier might expect. Rental yields are low, dampening demand from investors. And then you have the issue of rising housing supply capping price growth too. If it’s not one thing holding investors back, it’s the next…

Rental yields on the wane

Rental yields, for both houses and apartments, fell to record lows in October. Across the core capital cities, housing rental yields dropped to 3.4%. That’s down from a high of 4.2% back in May of 2012. What’s more, it comes as rental rates are flagging. Nationally, rents are up just 0.5% over the past year. CoreLogic reports:

Gross rental yields at record lows and affordability constraints are acting as a further disincentive, particularly in Sydney where the median unit price is equal to, or higher than, the median house price in every other capital city.

Additionally, new housing supply is moving through record levels which should help to ease the upwards trajectory of home values’.

All told, the slower rate of growth in rents is pushing yields lower too. Which means there are ever fewer incentives to invest in property today.

Looking at the market, rental yields are weakest in the major cities. Sydney, at 3.3%, and Melbourne, at 3%, have the lowest gross yields nationally. However, they did both see unit rents rise over the past year. Moreover, they lead the way in housing rental growth too. In Melbourne, asking rent price for houses was up 2.1% on last year. But the largest increase was reserved for Hobart, with rents up 5.1% YOY. Additionally, Hobart’s rental yield also rose by an impressive 5.3%.

The rise in the number of home listings helped heap pressure on rental yields. In the past month, over 45,000 new homes have gone on the market. That’s 4.1% higher than at this time last year.

That was partly why rents grew by a little over 2% across the nation. With yields at lows not seen in three years, the current market is particularly tough on investors. But it should be clear by now that we’re not living in an investors market anymore… far from it. Not only is investing costlier than it’s been for years, but yields are weaker. Investing doesn’t make a lot of sense when there’s so little upside going forward.

Looking ahead to tomorrow’s interest rate decision, there won’t be any respite for investors.

Unlike owners, investors won’t see any benefits should the RBA cut rates tomorrow. It’s true that banks slugged home owners with mortgage rates in recent weeks. But the impact of this may be undermined as early as tomorrow. If the RBA decides to lower interest rates, many owner occupiers will find themselves back in black. Their mortgage repayments will be no different than a month ago, prior to the big bank mortgage rate hikes. At least that’s assuming lenders pass on any RBA rate cut to borrowers.

Yet not everyone is convinced that owners will regain their losses. CoreLogic reckon borrowers are unlikely to see full benefits from a potential rate cut:

If we do see a rate cut, then we probably will see some lowering of mortgage rates, but not the full 0.25% cut’.

Yet in the competitive world of mortgage lending, there’s also a good chance they will. Home loan lending still plays a major role in the banking sectors’ bottom line. You could argue that banks lifted mortgages rates in preparation of RBA rate cuts. That suggests banks are willing to make life easier on owners. Of course all of this will depend on a rate cut taking place tomorrow, which is far from certain.

Either way, the picture for investors is crystal clear. Price growth is slowing, as are rental yields. With a strict regulatory framework in place, the situation for investors won’t improve anytime soon. It might still be a buyer’s market. You just have to be willing to live in what you buy.

Mat Spasic,
Contributor, Markets and Money

Markets and Money’s property expert, Phillip J. Anderson, is a bull when it comes to the housing market. He’s maintained all year that house prices are set to boom over the next decade.

If you’re an investor worried about potential property bubbles, Phil’s words will come as a boost. Even though prices appear to be slowing, there’s no telling what the market will look like in 6–12 months’ time.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.

He was right on both accounts.

In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money