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

REIV CEO Enzo Raimondo said that Melbourne’s was the largest increase in the median house price since the REIV started keeping quarterly records.

“In the December quarter of 2000 the median house price increased by 14.9 per cent and by 12.4 per cent in December quarter of 2007, compared to 15 per cent in the 2009 December quarter,” he remarked. “The combination of a better than expected economic conditions and strong population growth has resulted in an unprecedented level of pressure on housing costs in Melbourne.

“The city’s population is increasing by around 1,700 people per week and unfortunately housing construction has not responded as quickly as would be necessary to ease the pressure in the market.”

Volume is also on the rise, a sign that surging prices are based on strong demand not just weak supply.

“The level of confidence in the market is apparent from the number of homes being bought and sold; the REIV has recorded an increase of 22 per cent since the 2008 December quarter,” Mr Raimondo reported. “This is highlighted by the strong growth in the middle of the market. The largest increases in median prices have occurred for homes priced between $500,000 and $900,000.

“Burwood recorded the largest increase – 23.1 per cent – as the median increased from $658,000 to $810,000. It was followed by Ringwood, with a 16.2 per cent increase; Mount Evelyn, whose median increased by 16.1 per cent, and Brunswick, which now has a median of $724,250 after a 15.2 per cent increase.

“Prices paid for units and apartments have also increased substantially, with a 7.6 per cent increase in the median from $410,000 in the September quarter to $441,000 in this quarter.

“The suburbs with the largest increases in median price for units and apartments were East Melbourne, followed by Port Melbourne, Armadale, Caulfield North and Northcote.”

House prices increased in key centres in regional Victoria as well. The median house price in the City of Ballarat increased by 7.3 per cent to $265,000; in Greater Bendigo by 4.3 per cent to $261,000; and in Greater Geelong by 4.4 per cent to $342,000.

Analyst Bill Morris told the AFR that his findings – which come from an analysis of figures from the Queensland Department of Natural Resources and Water – showed average Brisbane house prices reached $560, 000 in the six months to December 2009 – up $49,000 on six months earlier.

At the Gold Coast it was a similar story, with a surge of 7.6% to an average of $575,000.

Mr Morris believes the data shows a bottom has been reached, but cautioned that low volumes indicated tighter lending practices were still causing a problem for buyers.

The industry body remained cautious about the sustainability of the up-cycle, however, despite being confident that 2009/10 would be a healthier year for new residential construction.

“First home buyer-related activity, the Social Housing Initiative, and the lagged impact of very low mortgage rates will combine to generate growth in new residential work done in 2009/10,” HIA Chief Economist, Dr Harley Dale said. “It remains unclear, however, whether the recovery can gather legs beyond this year in the face of persistent supply side obstacles, rising interest rates, and what to date is an insufficient number of upgrade buyers and investors to fill the void left by first time buyers.”

Seasonally adjusted work done on new residential dwellings increased by 2.8 per cent in the September 2009 quarter to an annualised worth of $36.3 billion. This was 3.9 per cent down on the September 2008 quarter and over 9 per cent lower than the previous cyclical peak seen back in early 2004. Work done on detached houses increased by 6.5 per cent over the September 2009 quarter but work done on ‘other residential building’ dropped by 5.5 per cent.

Seasonally adjusted new residential work commenced in the September 2009 quarter increased by 5.8 per cent, the first rise since mid 2008.

The leading state for new residential work was Queensland, which reported a six per cent increase, while Victoria (3%) and NSW (2.8%) were also strong performers.

As of 1 January 2010, legislation will kick-in that will restrict the grant to homes worth up to $1 million, but the state government has committed to going even further.

“Queensland led the way with our policy to restrict the First Home Owners Grant to homes worth less than $1 million,” Mr Fraser contended. “We need to ensure this grant is made available for those who most need it.

“No reasonable person would suggest that someone buying a first-home worth more than $1 million needs a $7,000 grant from the state government to get them started.

“While measures passed in legislation to limit the grant to homes worth less than $1 million begins today (1 January 2010), the government has now approved measures to further restrict the grant to homes worth less than $750,000.”

The changes will be voted on early in the new year.

“Research shows that most FHOG applications are made for houses valued at lower than the average capital city house price, which in Queensland is around $410,000,” Mr Fraser noted.

“This reflects the underlying purpose of the grant – to help first home buyers afford to enter the property market.”

Premier John Brumby said the state and federal stimulus packages helped to lift the figure over 20 per cent higher than the previous record.

“Last year we gave an extra boost for those Victorians wanting to build their own homes and 15,575 Victorians signed up to build, helping to create jobs for Victoria’s carpenters, electricians, builders, plumbers and other tradespeople,” Mr Brumby said. “That strategy has clearly worked and will continue to be an important part of our plan to fight the ongoing effects of the Global Financial Crisis in 2010.”

Melburnians planning to build their first home in 2010 can still take receive up to $18,000 from the Victorian Government. Regional Victorians can access up to $22,500 to build a new home outside Melbourne.

Housing Industry Association Chief Economist Harley Dale said the proportion of grants given to Victorians planning on building their own homes had jumped from 22 per cent in the first half of 2009 to a peak of 46 per cent in December.

“The extra home construction bonus has generated new residential building activity that would not otherwise have occurred and has created around 19,000 additional construction and related jobs in Victoria,” Mr Dale said.

Top 10 Metro Postcodes Grant Paid for 2009

3030: Point Cook, Werribee, Derrimut

3029: Hoppers Crossing, Tarneit

3023: Burnside, Deer Park, Caroline Springs

3977: Cranbourne, Cardinia

3064: Craigieburn, Donnybrook, Roxburgh Park

3810: Pakenham, Rythdale

3754: Doreen, Mernda

3337: Melton, Toolern Vale

3805: Narre Warren, Fountain Gate

3037: Calder Park, Hill Side, Sydenham, Plumpton

Top 10 Regional Postcodes Grant Paid for 2009

3350: Alfredton, Ballarat, Canadian, Invermay Park, Mt Clear, Mt Helen

3216: Belmont, Grovedale, Highton, Marshall, Waurn Ponds

3500: Mildura, Mildura East, Mildura West

3690: West Wodonga, Wodonga, Wodonga Plaza

3550: Bendigo, Diamond Hill

3844: Blackwarry, Callignee, Carrajung, Flynn, Koornalla, Loy Yang

3630: Shepparton, Dunkirk

3280: Warrnambool, Dennington

3551: Arnold, Epsom, Huntly, Myola, Toolleen, Wellsford

3214: Corio, North Shore, Norlane

Western Sydney was the most popular region for NSW first home buyers, accounting for seven of the top 10 suburbs where grants were received.

“This is a massive level of support for NSW families and the State’s housing sector,” Premier Kristina Keneally said. “Under the first home buyers grant program, more NSW families achieved the great Australian dream of owning their first home in 2009 than ever before.

Official figures from the NSW Office of State Revenue revealed:
• $1.034 billion worth of State and Commonwealth grants were received by NSW first home buyers in 2009;
• 70,213 first home buyers received grants;
• The grants saw the purchase of $26.03 billion worth of property; and
• Liverpool was the top suburb for first home buyers, with 1332 families receiving $33.6 million in grants.

The NSW Government has also extended its 50 per cent stamp duty cut for newly-constructed dwellings worth up to $600,000. The NSW Housing Construction Acceleration Plan (HCAP) was due to end on December 31, 2009 but will now continue through to June 30, 2010.

The top 20 suburbs for first home buyer grants in NSW in 2009 were:
1 Liverpool
2 Westmead
3 Blacktown
4 Leumeah
5 Parramatta
6 Bankstown
7 Wyoming
8 Hornsby
9 Hurstville
10 Cabramatta
11 Kellyville
12 Mount Druitt
13 Dee Why
14 Wagga Wagga
15 Wadalba
16 Baulkham Hills
17 Penrith
18 Auburn
19 Fairfield
20 Stanhope Gardens

REIV CEO Enzo Raimondo said that the second half of the year has been characterised by strong demand for residential property driven by an improving economy, increasing population, low interest rates and financial assistance for first home buyers. A lack of supply was noticeable in the first part of the year, but the strong marketplace saw supply surge in the last two months with buyers more than happy to step-in.

“Over the last six months all the factors that are required for a strong property market were present in Melbourne. This has resulted in suburbs right across the price ranges experiencing strong demand and significant increases in price,” Mr Raimondo advised. “The Victorian economy is performing well, population is growing and there is good confidence about the future, factors which will ensure the 2010 property market commences on a solid base.

“Strong demand has been recorded in both affordable and expensive suburbs, ensuring that many vendors have achieved very good results, a trend that the REIV expects to see continue in 2010 due to population growth and the constraints on supply.”

Property market key statistics
· 22,586 auctions held; 81 per cent clearance rate, compared to 63 per cent last year
· 18,364 sold at auction – totalling $12.1 billion
· 20 per cent more homes sold than in 2008, but still 10 per cent less than in 2007
· A peak clearance rate of 87 per cent reached on the 27-28 June
· The greatest number of homes sold at auction on one weekend was 867, on 12-13 December
· Rental vacancy rate for Melbourne between 1.2 and 1.5 per cent over the year

Top five streets for sales in 2009
· St Kilda Rd, Melbourne:197 sales
· Nepean Hwy, Frankston: 102 sales
· City Rd, Southbank: 97 sales
· Kavanagh St, Southbank: 73 sales
· Queens Rd, Melbourne: 70 sales

Top five suburbs for all sales
· Reservoir: 1229 sales
· Richmond: 1102 sales
· Frankston: 977 sales
· Melbourne: 963 sales
· St Kilda: 896 sales

Five suburbs with highest number of auction sales
· Richmond: 432 auction sales
· Reservoir: 385 auction sales
· St Kilda: 301 auction sales
· Glen Iris: 293 auction sales
· South Yarra: 271 auction sales

Five suburbs with highest increase in median price (all dwellings) 2009 compared to 2008
· East Melbourne: 41 per cent increase in median
· Eaglemont: 29 per cent increase in median
· Dallas: 27 per cent increase in median
· Toorak: 21 per cent increase in median
· Footscray: 20 per cent increase in median

There was a fall in the number of houses approved (-2.0%), however this was offset by a rise in approvals for dwellings other than houses (+31.7%), with the overall 5.9% upward movement double the forecasts of economists. The greatest improvement to the number of dwelling approvals was seen in New South Wales (+6.0%), Victoria (+10.2%), and Queensland (+12.4%).

Analysts believe that, with supply tight, the property sector is in for another strong year, albeit unlikely to match the rapid growth of last year. Interest rates are seen as the major dampener, with the prospect of another rate hike from the RBA rising on the back of this data and recent house price figures.

The RBA has raised the official cash rate by one quarter of a percent at their past three meetings (October, November, December) – taking the rate from 3 per cent to 3.75 per cent. They do not meet in January, with the next meeting to take place on February 2 when inflation data (due in late-Jan) will be in the forefront of their minds along with other key housing industry statistics and retail sales.

Based on the RP Data – Rismark National Home Index, Australia’s housing market continued to grind out strong gains in the month of November on the back of similar growth of 1.3% in October. Over the first 11 months of 2009, Australian home values rose by 11.3 per cent following on from their modest 3.8 per cent peak-to-trough falls in 2008.

The most important story of 2009 has been the extraordinary recovery in the Melbourne and Sydney housing markets. In the three months to end November, home values in Melbourne and Sydney have outperformed most other capitals rising by 4.5 per cent and 3.2 per cent, respectively.

Melbourne has been Australia’s best performing capital city outside of Darwin (+17.9 per cent). Canberra also had a strong year (+10.9 per cent), while Brisbane (+6.9 per cent), Perth (+6.5 per cent) and Adelaide (+5.7 per cent) all saw a moderate resurgence.

“At the end of 2008 most forecasters were predicting substantial house price falls in the following 12 months,” Christopher Joye, managing director of Rismark International, noted. “Almost all of them were proven wrong. Australia’s housing market has surprised on the upside with impressive double-digit capital gains in the year-to-date. The inability of most analysts to get close to divining Australia’s housing market trajectory during the GFC and in the recovery since, combined with the many misconceptions one typically hears about housing, illustrates just how poorly understood the sector is.”

Rpdata.com Research Director Tim Lawless suggested that the November results showed the Australian market may be less sensitive to interest rate rises and the removal of Government stimulus than many would have thought.

“The strong November results were achieved despite the 25 basis point lifts in the official cash rate in October and November as well as the wind back of the boost to the First Home Owners Grant which was halved on the first of October. First home buyers have been trending down since peaking in May ‘09 and the gap is being filled by upgraders and investors who are much less sensitive to rate rises and the level of stimulus.”

The RBA has since raised interest rates by a further 25 basis points in December and more rate rises are likely throughout the year.

Mr Joye said that as mortgage rates normalise to around 7-8 per cent, house price growth will taper back to more modest single-digit levels in 2010.

“Since many borrowers did not reduce their mortgage repayments in 2008-09 when the RBA cut rates by circa 40 per cent, household balance-sheets should be well positioned to absorb higher costs,” he advised.

A closer look at the data

The median Australian home price in all capital cities over the three months to end November was $439,800 (including houses and units). Across all regions in Australia, the national median dwelling price is $395,000.

The median Australian house price in capital cities is $470,000 while the median unit price is $390,000.

The most expensive houses, based on median price, are in Sydney ($550,000), followed by Canberra ($535,000), Darwin ($501,000), Melbourne ($486,400), Perth ($485,000), Brisbane ($449,850), Adelaide ($372,000) and Hobart ($330,000).

Sydney has the most expensive unit market with a median price of ($417,000). This is followed by Melbourne ($402,500), Canberra ($390,000), Perth ($385,000), Brisbane ($375,000), Darwin ($357,000), Adelaide ($310,000) and Hobart ($270,750).

National rental yields tapered slightly in November with the gross annualised rental yield for units being 4.9 per cent while house yields are lower at 4.1 per cent.