Mid-sized capitals outpace Sydney and Melbourne as borrowing capacity tightens
Australia’s dwelling values continued to climb in November, but the rate of growth appears to be losing momentum as stretched affordability and higher-for-longer interest rates start to weigh on demand.
Cotality’s national Home Value Index rose 1% over the month, the third consecutive monthly gain of at least 1%, but down from 1.1% in October. The slower headline rise was driven by softer conditions in Sydney and Melbourne, where values increased by 0.5% and 0.3% respectively, while all other capitals recorded gains of at least 1%. Perth led the market with a 2.4% monthly increase.
Source: Cotality
Tim Lawless, research director at Cotality, said the pattern of performance seen late last year has re-emerged, with the mid-sized capitals once again pulling away from the two largest cities.
“The skew towards the mid-sized capitals is especially evident in Perth, where listings are holding more than 40% below average, buyer demand is elevated and the 2.4% monthly rise in dwelling values has added just over $21,000 to the median in November, roughly $5,000 per week,” Lawless noted.
In contrast, Sydney’s more modest result may signal that price growth is running up against borrowing limits for many households. Listings in Sydney are only 2.2% below the five-year average for this point in the calendar year, compared with an overall capital-city shortfall of about 16%. While most markets gathered pace through spring, Sydney’s monthly growth topped out at 0.9% in August and has eased since then.
Auction markets also point to a cooler tone. Clearance rates have trended lower since peaking in mid-September and slipped below their 10-year average by mid-November. In both Sydney and Melbourne, clearance rates held in the low-60% range through the latter half of November, suggesting a more balanced negotiation environment between buyers and sellers.
Affordability and serviceability pressures
Affordability indicators continue to deteriorate. To the September quarter, the national dwelling value-to-household income ratio reached a record high, with the median dwelling now 8.2 times annual pre-tax household income. The share of income required to service repayments on a mortgage at the median value is close to record territory at 45%.
These ratios underline the constraints on new borrowing, particularly for first-home buyers and highly leveraged owner-occupiers. Larger deposit hurdles and higher servicing tests are likely to limit the pool of eligible borrowers even as demand for housing remains strong in many locations.
Another potential headwind is the recent rebound in inflation and the market’s reassessment of the interest rate outlook. With investors and borrowers increasingly expecting that the Reserve Bank will not cut the cash rate in the near term, sentiment towards housing could soften.
“With inflation once again above the RBA’s target range and rates potentially on hold for the foreseeable future, it's likely housing sentiment will suffer,” Lawless said. “With housing affordability already stretched and worsening, it stands to reason that fewer borrowers will be able to access credit as serviceability barriers become more prominent.”
Segmented growth across price tiers
According to Lawless (pictured right), the combination of high prices and stricter serviceability is already visible in the pattern of value growth across price points.
“We can already see the flow through effect from such stretched affordability and serviceability measures, with growth in housing values skewed towards lower price points of the market,” he said.
“Over the past three months, most of the state capitals have seen values across the lower quartile of the market rising the fastest. Melbourne, where housing affordability isn’t quite as stretched, is the one exception, with the city’s broad middle of the market seeing the fastest lift in values.”
This suggests ongoing demand in more affordable segments, even as higher-priced brackets encounter borrowing constraints. It may also support continued investor interest in lower-priced stock where yields and entry prices remain relatively more attractive.
Limited impact expected from new DTI settings
The Australian Prudential Regulation Authority has announced that loans with high debt-to-income (DTI) ratios will be capped at 20% of new lending from February next year. However, Lawless expects the practical impact on aggregate housing activity to be modest, given current origination trends.
The majority of recent mortgages sit well below a DTI of six, implying most borrowers will not come into direct contact with the new threshold under current settings.
“This new credit policy won't be implemented until February next year, but even then, it's likely to only affect the margins of borrowing activity,” Lawless said.
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