Fewer houses selling at affordable price points

After home values fell by 3.8% during the GFC, the market has seen a 17.2% gain across the combined capital cities. The surge in home values coupled with the higher interest rate environment is making it increasingly difficult to find a house priced under $500,000 within the larger capital cities.

The final quarter of 2008 was the most recent low point in the property market in terms of property value growth. Values had fallen by almost 4% due to the onset of the Global Financial Crisis. The falls were short lived, and since the start of 2009 Australian residential property values have mostly recovered strongly. Across the combined capital cities value growth has been quite strong, however it has not been homogenous throughout each capital city.

Over the period from Dec-08 to Aug-10, Melbourne and Darwin have been the strongest performing markets and have recorded total value growth in excess of 20%. Conversely, Brisbane and Perth were the only two capital city markets in which property value growth has been below 10% over the timeframe.

The result of the strong growth in home values has been higher property prices which in turn make it more difficult for prospective home owners to buy into the market. Couple with this the higher interest rate environment and the prospects for first home buyers are even more challenging.

Further clarity surrounding the issue is provided by looking at dwelling sales by price point across all of the capital cities. Looking at dwelling sales (houses and units combined) during the final quarter of 2008 and comparing them to the most recent quarter (second quarter of 2010) clearly highlights the bracket creep that has occurred post-GFC.

During the 4th quarter of 2008, more than 72% of all capital city dwellings were sold at prices below $500,000. Over the second quarter of this year, dwelling sales priced below $500,000 accounted for less than 56% of all sales. The result highlights that over the June quarter of 2010, slightly less than half of all property sales transacted at prices in excess of $500,000. In percentage terms, the number of dwelling sales priced below $500,000 has declined by -23% between the end of 2008 and the second quarter of 2010 across the combined capital cities.

Across each individual capital city there has been deterioration in the proportion of dwelling sales priced under $500,000 over the period. During the final quarter of 2008, every capital city except for Sydney recorded at least 70% of its dwelling sales at prices below $500,000. Predictably, Hobart and Adelaide, which are the two most affordable capital cities, had the greatest proportion of property sales below $500,000. On the other hand, Sydney and Perth had the smallest proportion of sales below $500,000 at that time. Also interesting to note is how few sales were occurring at prices above $700,000.

Across the combined capital cities just 12.2% of all sales were for properties priced in excess of $700,000. Sydney and Melbourne recorded the greatest number of sales at that time and Hobart and Darwin had the fewest.

Looking at the most recent results, there is a clear shift across each market. During the quarter, Hobart and Adelaide still had the greatest proportion of sales below $300,000 but there was a marked decline in the market share (particularly in Adelaide). At the same time, all other cities recorded less than 65% of sales at prices below $500,000 with Sydney (47.5%), Perth and Canberra (both 53.8%) recording the lowest proportion of sales below $500,000. As the market sub $500,000 has deteriorated much of the sales activity has shifted into the price points above $700,000. Sydney (29.6%) and Melbourne (21.5%) had the greatest proportion of sales in excess of $700,000 over the most recent quarter.

The National Housing Supply Council’s State of Supply 2010 Report looks at the cost of developing new infill development (2 bed units) and greenfield developments (new houses) across the major capitals. New infill development is most affordable in Adelaide ($468,389) and most expensive in Sydney ($553,621). Importantly, between 24% (Melbourne) and 32% (Sydney) of the cost of development is due to the raw cost of land and Government taxes and charges. Meanwhile, greenfield development is most affordable in Brisbane ($369,751) and most expensive in Sydney ($560,711). Costs associated with raw land and Government taxes and charges account for between 31% (Adelaide) and 50% (Sydney) of the total development costs.

The high cost of bringing new dwellings to the market coupled with the above results show that the supply (and subsequently the volume of sales) of more affordable properties has declined rapidly since property values once again started increasing post GFC. The major hurdles in rectifying this problem are making it more affordable to bring new dwellings to the market and providing a level of amenity in new development areas to make them attractive to potential buyers.

With the cost of new dwellings well in excess of $300,000 across each city, it is imperative that Government and developers find a way to make the provision of new dwellings affordable and in locations that hold appeal due to the level of local amenity. Because the lack of sales in the more affordable price points during the last quarter is most likely the result of a lack of appropriate supply more so than it is the result in a fall in demand for affordable property.

Tim Lawless is the Director of Property Research at RP Data.