Current Recovery is Hurting First Home Buyers

Sydney and Melbourne are driving rising property values in Australia
Photo: Paragon Apartments

Australian property values grew another 1.3 per cent in October according to the RP Data-Rismark index, raising yet again more questions about the sustainability of house prices. 

Combined capital city house values are up by 7.9 per cent over the last 12 months, representing the fastest growth rate over the past three years.  

On a year to date basis, property values have increased by 8.2 per cent. 

Sydney and Melbourne the Driving Forces

The combined monthly results mask the divergent trends across the major cities.  

Although over the month of October, home values strengthened in Sydney (+2.4 per cent), Melbourne (+1.2 per cent), Brisbane (+1.4 per cent), Darwin (+1.6 per cent) and Adelaide (+0.3 per cent); they actually fell in Perth (-0.2 per cent), Hobart (-2.3 per cent) and Canberra (-1.5 per cent). 

With Sydney and Melbourne experiencing year-to-date growth rates of 13.4 per cent and 8.7 per cent respectively, it is clear that rising property values in Australia are mostly driven by these two cities.

“Whilst the continuing price increases represent great news for some, many are worried about the wider implications…”

However, with home values up by 2.6 per cent over the last three months, there is talk of growth conditions potentially spreading to Brisbane, where the growth rate remains 8.4 per cent below its highs.

Other Signs of Improving Market Conditions

The housing market shows other positive indicators, with capital city homes selling 12 days faster compared with a year ago at 34 days, and the level of discounting by vendors declining from 6.8 per cent to 5.7 per cent.

In terms of credit growth, the latest ABS housing finance data shows a seasonally-adjusted 4.4 per cent increase in the number of owner-occupied finance commitments for September. Average loan size also rose by 1.9 per cent over the month.

Whilst the continuing price increases represent great news for some, many are worried about the wider implications.   

First Home Buyers Notable Casualties

As per the data from ABS, first home buyer commitments in September fell by 9 per cent (non-seasonally adjusted) and represented only 12.5 per cent of total owner-occupied commitments.

SQM Research also showed that the national rental vacancy rate fell to 2 per cent, suggesting first home buyers are remaining renters for longer.

According to Louis Christopher from SQM, in an active sales market and in most housing recoveries, vacancies arise because renters turn themselves into first home buyers. 

Therefore, the tight vacancy rate appears to confirm that the current recovery is investor led. 

Declining Rental Returns

RP Data’s Cameron Kusher reported that rising house prices have already started to erode rental returns in markets such as Sydney and Melbourne.

“The national rental vacancy rate fell to 2 per cent, suggesting first home buyers are remaining renters for longer.”

“It could be expected that value growth will continue to outpace rental growth within these cities over the short-term and if this occurs it will lead to ongoing decline in rental returns,” Mr Kusher said.

Clouds Loom Over Lending Standards

There are concerns that lower lending standards are contributing to the higher property values.

“It would be almost impossible for the recent increases in the price of housing to occur without there being some fairly aggressive lending pressed into the serviceability of loans,” said Graham Andersen of Mortgij Analytics.

Additionally, higher loan-to-valuation ratios products are on the rise, though the Australian Prudential Regulatory Authority (APRA) has vowed to monitor the situation closely.