The year ahead in property

After recent strong growth in home values, we take a look at the factors that will affect property in the coming year.

Summary: Factors affecting the property market next year will include concerns about job security, new APRA guidelines for sound lending practices, the slow growth in household incomes, weak consumer sentiment, a possible slowing in lending to investors, recommendations for new foreign investment rules, the falling Australian dollar and continued low interest rates.

Key take-out: Home values are still rising at a healthy rate, despite growing less this year than last. We expect the housing market dynamic to shift geographically in 2015.

Key beneficiaries: General investors. Category: Property investment.

The combined capital city housing markets have seen values increase by 7.0% over the first 11 months of 2014. 

Throughout the whole of 2013, capital city home values increased by 9.8%, indicating that the rate of home value growth is likely to be lower this year than last.

We see these key factors affecting residential property in the year ahead:


The national unemployment rate was recorded at 6.3% in November 2014 which is the highest unemployment rate since September 2002.

If employees become concerned about job security they will be less inclined to commit to purchasing a home. Furthermore, if employees can’t work as much as they like and subsequently earn as much as they’d like they may also not be able to purchase a home.

APRA’s new steps for sound lending practices

Recently APRA (the Australian Prudential Regulation Authority) wrote to all Australian authorised deposit-taking institutions (ADIs). The letter highlighted further steps that will reinforce sound lending practices. 

Although the note didn’t indicate that any macroprudential tools would be formally implemented, the letter noted that APRA will be increasing supervisory surveillance to reinforce sound lending practices.

Through these guidelines they have advised the ADIs of the lending environment they expect. Although there have been no blanket macroprudential tools, the letter is pointed and notes that ADIs that do not adhere to these rules will be under review to stricter lending limits. These guidelines are likely to have an impact on the residential housing market. 

Household income growth

While home values have increased by 8.5% over the 12 months to November 2014, real household incomes have increased by just 0.8%. One wonders how long home value growth can continue to outpace household income growth. 

Over the 10 years to September 2014 nominal home values have increased 52.4% compared to real household income growth of 36.4%. These two figures are not significantly different and real home value growth has actually been lower than growth in household incomes. This would seemingly suggest that the current surge in home values, which has started to slow, cannot continue all that much longer without income growth.

Consumer sentiment

According to the Westpac and Melbourne Institute’s monthly measure of consumer sentiment, consumers have been more pessimistic than optimistic for 10 consecutive months. To put that in perspective, consumers haven’t been this consistently gloomy since the depths of the financial crisis in 2008 and early 2009. 

The level of consumer anxiety is more confronting when you consider that those with savings in a financial institution are currently earning virtually no interest with the cash rate sitting at 2.5%.

Consumer sentiment is closely correlated with housing demand. If consumers are feeling less confident about the overall economic conditions, they are going to be much less likely to make high commitment decisions such as taking out a new mortgage.

Housing finance commitments

In October 2014, there were $11.7 billion in housing finance commitments to owner occupiers for new loans, $5.4 billion to owner occupiers for refinancing purposes and $12.1 billion to investors. 

With the new APRA guidelines it looks as if lending to the investor cohort will slow in 2015. It is unlikely this can simply be replaced by lending to owner occupiers for new loans. In fact, new lending to owner occupiers has been trending lower since it peaked at $12 billion in lending in November 2013.

If lending to investors slows as owner occupier lending is already doing, it seems that there will be less mortgage demand and subsequently less property transactions. In turn, this is likely to result in lower levels of capital growth across the housing market.

Dwelling approvals

Dwelling approvals have lifted significantly throughout the past two years, providing a significant pipeline of new construction. 

Although dwelling approvals have eased over recent months, over the 12 months to October 2014 there were 197,529 dwelling approvals which is hovering around the highest annual number on record. On a monthly basis dwelling approvals peaked in January 2014 and although they remain high, they have trended lower.

If growth in home values slows throughout 2015 along with a slowdown in housing transactions, we may see some of the pipeline of approvals, particularly unit approvals, not actually make it to construction. 

Recommendations for new foreign investment rules

The House of Representatives Standing Committee on Economics recently released its findings and recommendations following a review of foreign investment. 

Among the key findings of the report were:

1. Recognising there is no accurate or timely data that tracks foreign investment in residential real estate, the Committee recommended the establishment of a national register of land title transfers that records the citizenship and residency status of all purchasers of Australian real estate.

2. Recommending an application fee of $1500 for each approval application made to FIRB by non-resident foreign investors in order to fund improved administration and monitoring of the foreign investment rules undertaken by FIRB.

The report also recommends the following civil penalties for breaches of the foreign investment framework:

- Financial penalties to be calculated as a percentage of the property value, rather than restricted to $85,000 as is currently the case; and

- The regime applies to both foreign investors and any third party who knowingly assists a foreign investor to breach the framework.

Although these are just recommendations at this stage, one would hope that the committee’s recommendations do get implemented.

Importantly, it is unlikely that any of these recommendations would act as a disincentive to foreign investment. Rather, they would result in improved transparency about such investment.

Australian dollar

In Australia we generally like to compare our currency to the US dollar. After the end of month peak in the exchange rate of $1.08 in February 2012, the exchange rate has now fallen to close to US82c. Importantly, most of the fall has occurred recently; six months earlier the exchange rate was US93c.

The fall in the trade weighted index (TWI) has not been as large as the fall relative to the US dollar. The TWI was recorded at 68.2 at the end of November, down from 71.5 six month ago and a peak of 79.2 in February 2012. Nevertheless, the Australian dollar has weakened.

If the Australian dollar continues to depreciate, it is likely that Australian residential property will potentially become even more attractive for overseas buyers as the relative cost improves.

Interest rates

Official interest rates were recorded at 2.5% in December 2014. With no meeting of the Reserve Bank’s board in January they will remain at that level until at least February. The average standard variable mortgage rate is currently 5.95%. Discounted variable rates are 5.1%, as are three-year fixed rates.

The RBA has repeatedly stated that they believe a period of interest rate stability is the most prudent course.

Nevertheless, over recent months there have been a growing number of economists predicting the next movement in rates would be lower as the overall economic performance slows. The cash rate futures market is now also pricing in a 25 basis point rate cut to interest rates by June next year.

A lower interest rate would seemingly make investment in housing even more attractive as returns on cash savings reduce further. 

Therefore as values are still rising at a healthy rate, at least at a high level and in trend terms, we anticipate that 2015 will see the housing market dynamic shift geographically. This is our city-by-city view of the market in 2015.


Housing market conditions have been nation-leading over the current cycle with dwelling values up by 31% over the cycle to date. The rate of capital gain is slowing down though, after the annual rate of growth peaked in April last year at 16.7%. 

By the end of 2014 we expect the annual rate of growth will have slowed to approximately 12.5%. We expect the trend towards a more sustainable rate of capital gain to continue over 2015.


The Melbourne housing market has played second fiddle to Sydney’s rate of capital gain over the current growth cycle, with values moving a cumulative 17.6% higher by the end of November this year. The rate of annual growth across the Melbourne housing market has been slowing since January when dwelling values had moved 11.9% higher over the 12 month period. By the end of 2014 we expect the annual rate of capital gain to have drifted back to approximately 8%. This slowing trend is likely to continue through 2014 as investor demand is dampened by the low rental yield scenario as well as tighter finance controls around investment lending from the banking sector.


Brisbane (along with Adelaide and Hobart) is one of only three capital cities where the annual rate of capital gain is likely to be higher this year than it was last year. We are expecting the annual rate of capital gain to finish the year around the 7% mark, compared with a 5.1% capital gain over the 2013 calendar year. With the rate of capital gain holding relatively firm over the second half of 2014, fewer affordability pressures and better rental yields than Sydney or Melbourne, we are expecting growth in Brisbane dwelling values to outperform the capital city average over the coming year.


Despite the uncertainty in the local economy, the Adelaide housing market is likely to finish the 2014 calendar year with a higher rate of capital gain compared with the 2013 calendar year. We are expecting Adelaide values will have increased by approximately 3.5% in 2014 compared with a growth rate of 2.8% over 2013. Transaction numbers have been rising over the second half of the year indicating a rise in buyer demand, affordability pressures are relatively tame and rental yields are higher than what can typically be found in Sydney and Melbourne. While we aren’t expecting values to surge across Adelaide in 2015, a steady market with values continuing to show a modest rise is the likely outcome.


The Perth housing market moved through the peak of its growth cycle in December 2013 when then annual rate of growth was recorded at 9.9%. Since then the annual rate of growth has drifted substantially lower and we expect by the end of 2014 the annual rate of growth will be closer to 1%. Population growth into Western Australia has slowed sharply which is reducing demand for housing at a time when there is a large amount of new detached housing approved for construction. Dwelling values are likely to continue their weak trend and may potentially end the next calendar year lower.


The Hobart housing market has been the weakest of any capital city post GFC. In fact, Hobart dwelling values remain 3.9% lower than what they were at the beginning of 2009. Dwelling values are likely to finish the 2014 calendar year about 6% higher, and as demand from lifestyle buyers continues to rise, we expect Hobart home values to continue their moderate trend higher during 2015.


The Darwin housing market has been a solid long-term performer, recording the highest rate of capital gain over the past decade across the capital cities. Dwelling values have increased by 17.5% over the length of the current growth cycle, however growth in dwelling values has been trending lower over the second half of 2014. The 2014 calendar year is likely to see Darwin dwelling values increase by approximately 1.5%. Prospects for further growth over 2015 are diminishing due to a wind down in major projects.


The national capital’s housing market saw a material slowdown over the second half of 2014 with dwelling values likely to finish the second half of the calendar year approximately 1% lower. Uncertainty surrounding the local labour market, federal government job cuts and potentially an oversupply of housing are all factors that are likely to contribute flat to falling housing values during 2015.

This is an edited version of earlier work by Cameron Kusher and Tim Lawless of CoreLogic and RP Data.

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