After recording a stellar performance over most of 2009 the Australian residential property market ended 2009 on a softer note with national home values dipping slightly during the month of December.

Australian home values recorded a 0.3 per cent fall in the month of December as the seasonal effect of the summer slowdown combined with rising interest rates and fading first time buyers put a dampener on a very strong year for Australian residential real estate.

While capital growth across all homes in the December quarter was the weakest of the year, values were still up an impressive 2.1 per cent – according to the Rismark-RP Date index.

All capital cities recorded strong capital gains during 2009 with the most spectacular results seen in the Darwin and Melbourne markets where home values were up 16.6 per cent and 15.6 per cent, respectively.

The weakest market during the year was Adelaide with values rising 6.2 per cent. Residential property in Brisbane achieved a slightly better outcome with 7.3 per cent growth. Arguably one of the most interesting stories of 2009 has been the recovery of the Perth property market with values increasing by 7.1 per cent after cumulative losses of 7.9 per cent since September 2007.

According to Tim Lawless, rpdata.com’s head of research, the market drivers changed considerably over the year.

“The strongest gains were recorded early in the year with national home values up 3.1 per cent over the first quarter of ‘09. The market was being led by first home buyers and consequently the most affordable end of the market saw a 3.9 per cent lift in values,” he advised. “Over the second and third quarters it was upgraders in the middle and the top ends of the market that generated the strongest gains. The top 20 per cent of Australia’s most expensive postcodes increased in value by 9.5 per cent over the last three quarters of the year compared to 4.1 per cent growth in cheapest 20 per cent of postcodes.”

Christopher Joye, managing director of Rismark International, expects higher interest rates will ensure the market does not overheat.

“We are projecting that the housing market will cool as mortgage rates normalise back to 7-8% levels. This implies that capital growth rates will fall back to single digit levels consistent with expected change in the incomes of prospective buyers.”

“It pays to remember that the price of Australian homes is only around 4.1 times disposable household incomes, which has been unchanged since September 2003. This tells us that over the last six years Australian house price have very closely tracked changes in household incomes. Contrary to popular myth, Australia’s house price-to-income ratio is not unusually high, nor has it risen in recent times,” Mr Joye added.

Rental market
Rental markets around the country have failed to keep pace with the rapid growth in home values resulting in lower rental yields across every capital city. Nationally, rental rates are down about 2.5 per cent which has resulted in rental yields being eroded.

Units outperform houses
2009 saw Australian unit values increase by 13.5 per cent compared with house values up 10.4 per cent. The trend was the consistent across every capital city, with units returning a strong gain over the year.

“The higher gains in the unit market are a deviation from normal performances,” Mr Lawless advised. “Historically houses have tended to outperform units. The recent reversal in fortunes has occurred due to more buyers leaning towards units because they have a more affordable price tag and are often located in more strategic locations in relation to transport and amenity than many detached housing options.

“Other factors may also include changing housing preferences, particularly amongst baby boomers, and more highly targeted unit developments being delivered to the market.”

City by City

Sydney

It is often forgotten that between December 2003 and December 2006 Sydney home values fell by over 6 per cent. 2009 finally saw Sydney home values recover with the December ‘09 home value now 5.8 per cent higher than the previous Feb ‘04 peak. Rental yields in Sydney are slightly higher than the national average with houses returning a gross yield of 4.2 per cent and units returning 5.1 per cent. The median price of a Sydney house over the December quarter was $600,000 and the median price of a Sydney unit was $430,000.

Melbourne

Similar to Sydney, between the end of 2003 and end of 2005 Melbourne home values only rose by 2.8 per cent. The Melbourne market recovered much sooner than Sydney’s and home values recorded a strong surge in 2007 (up 21 per cent compared to a 7 per cent gain in Sydney). 2009 was another big year for the Melbourne market with house values rising a further 14.9 per cent and unit values up 18.0 per cent. With such strong capital gains and a relatively flat rental market Melbourne rental yields suffered. Houses are now providing a gross rental return of 3.7 per cent (the lowest in the nation) and units are returning 4.3 per cent (the second lowest in the nation after Perth). The median price of a Melbourne house over the December quarter was $499,000 and the median price of a Melbourne unit was $410,750.

Brisbane

The Brisbane market remained comparatively subdued during 2009 with values increasing by 7.3 per cent over the year. The comparatively weak performance can partly be attributed to the strong gains recorded in 2007 where Brisbane values gained 24.6 per cent over the year. Gross rental yields in Brisbane remain above the national average with houses returning 4.4 per cent and units returning 5.0 per cent. 2010 is likely to see Brisbane outperform the national average due to the fact it is in a later stage of the cycle, together with ongoing strong population growth and the benefit of several major infrastructure projects coming to fruition. The median house price in Brisbane is now $463,000 and the median unit price $383,600