2016 residential property review and outlook for 2017

Interest rate announcement – February 2017

Today the Reserve Bank of Australia met to review the official cash rate. After last cutting rates in August last year, the RBA have decided to leave rates on hold at 1.50% again this month. We expect that most lenders will leave their rates unchanged, in line with the Reserve Bank’s decision.

Despite some challenges throughout the year, particularly the increasingly restrictive lending criteria imposed by lenders, the Australian residential property market performed strongly overall in 2016. This is particularly the case in capital cities where house prices appreciated over the course of the year in all bar one capital city, Perth (see table below):

Capital city	CY2016 change in value	Median dwelling price
Perth	-4.3%	$490,000
Sydney	15.5%	$852,000
Melbourne	13.7%	$641,200
Hobart	11.2%	$345,000
Combined Capitals	10.9%	$615,000
Canberra	9.3%	$595,000
Adelaide	4.2%	$425,000
Brisbane	3.6%	$486,000
Darwin	0.9%	$495,500

Source: RP Data as at 31 December 2016. (CY=Calendar Year)

However, these relatively strong headline figures obscure one of the more noteworthy trends that emerged during the year – an increasing divergence in the growth rates in capital cities between house and apartment prices. According to CoreLogic data, at a macro level, capital city house prices increased by 11.6% while the value of units only increased by just over half that amount at 5.9%.

This divergence was greatest in Melbourne and Brisbane where buyers expressed concern over a possible oversupply issue. In Melbourne, house prices increased by 15.1% while units only increased by 1.7% in 2016. Similarly, Brisbane house prices increased by 4.0% while unit prices actually fell slightly by -0.2%.

Regional areas were also positive in 2016, albeit by not as much as capitial cities. The overall regional housing market increased by around 2.8% with the strongest gains coming from NSW (+7.3%). Regional WA was the weakest performing region, recording a reduction in value of -7.0% for the year.

Our outlook for interest rates and residential property

As we begin to navigate through 2017, we believe that there are a few trends we think are worth looking out for:

We expect the RBA to leave rates on hold for most, if not all of the year.
Lenders are likely to raise mortgage interest rates independent of the RBA due to higher funding costs.
Increased supply levels of new apartments.

Overall, we are of the view that 2017 will see another year of positive house price growth, however we expect the amount of growth to be less than 2016 due to high supply levels, higher mortgage rates and lower investment demand.