Dwelling values increased by just 0.1% across the combined capital cities in April, with housing market conditions slowing in both Sydney and Melbourne, according to CoreLogic’s Hedonic Home Value Index, April 2017.

This is “the lowest month-on-month rise in capital city dwelling values since December 2015,” said Tim Lawless, head of research at CoreLogic RP Data. “The moderation in growth was due largely to a slightly negative April result in Australia’s largest capital city housing market, Sydney, where dwelling values were broadly flat (rounded up from -0.04%) over the month. The result for Melbourne was also lower than previous months of 2017, with dwelling values up 0.5% over the month.”

Softer results after dramatic capital gains

The softer results across Sydney and Melbourne come after dramatic capital gains were recorded over the second half of 2016 and the first three months of 2017. Between July 2016 and the end of March 2017, Sydney dwelling values increased by 11.3%. Dwelling values in Melbourne increased slightly more at 12.6% during the same period.  

April’s results mark the weakest monthly change in dwelling values across the Sydney market since December 2015, when CoreLogic reported a 1.2% decline in Sydney dwelling values. “The soft reading comes after dwelling values have risen by 75.1% over the past five years, an annual rate of growth of 15% over this period,” the report said.

Most other capital cities also recorded softer growth conditions in April compared to the first three months of 2017. “[However] the trends generally remain positive, with quarterly growth of 2.9% across the combined capitals index,” said Lawless.

The strongest housing market is currently Hobart

Home values in the Tasmanian capital have risen 5.1% over the past three months. The housing market has staged a “solid improvement over the past two years,” according to the CoreLogic report. As a result, Hobart has become the third best performing capital city on an annual basis, with dwelling values moving nearly 14% higher over the past 12 months alone.

Listed here are other highlights over the three months to April 2017:

  • Best performing capital city: Hobart (+5.1%)
  • Weakest performing capital city: Perth (-2.4%)
  • Highest rental yields: Hobart and Darwin houses (gross rental yields of 4.9%); Hobart units (5.4%)
  • Lowest rental yields: Sydney and Melbourne houses (gross rental yields of 2.7%); Darwin units (3.7%)
  • Most expensive city: Sydney (median dwelling price of $860,000)
  • Most affordable city: Hobart (median dwelling price of $363,200)

 Where should you invest?

With rental yields for houses declining in Sydney and Melbourne, should property investors cast their eyes on the Hobart and Darwin property markets instead, where gross rental yields for houses have risen substantially? 

We asked three experts what they thought, and their feedback was mixed.

Philippe Brach, founder, Multifocus Properties & Finance

“When investing in property, capital growth is the name of the game. This is what creates wealth. However, an investor has to be able to hold a property whilst it is growing in capital. So the sweet spot is to find properties that have great capital growth potential, but also an acceptable cash flow. It is particularly important for investors building a property portfolio. If interest rates increase and your property is cash flow negative by $150 per week, this may be acceptable, but what if you have five properties, each costing you $150 per week?

“This is why investors should be careful about investing in Sydney and Melbourne, as the yields are very low (i.e. cash flow is not too good, and interest rate increases will make it a lot worse). But conversely, investing in Hobart and Darwin may be good from a cash flow point of view. However, capital growth is patchy and you may not achieve a steady increase in your wealth.”

Rob Zubin, principal & managing director, My Property Hunter

“Currently Hobart is experiencing high demand for property, with the market as strong and as buoyant as I have seen it in over 10 years. This is true for both the sales and rental market. The strongest demand is in the central Hobart suburbs, from Sandy Bay to New Town. But the demand for property is now extending much wider with investors seeking better rental returns.

“Most properties are receiving multiple offers and selling within a week or two, usually for above the listed range. We are dealing with investors (and significant enquiries from investors) who’ve been forced out of the Sydney and Melbourne property markets where house prices for many are now out of reach and rental returns hover around 3% or less.

“Investors seeking reasonably priced properties and reasonable rental returns are drawn to Hobart because of its affordability, as well as the current strength of the market. Investors can secure a home for around $400,000, and achieve a rental return of up to 6%. Inner-Hobart will see returns of around 4%. Approximately 20 minutes from Hobart, up to 6% can be achieved. This does not include areas and suburbs dominated by government housing, where returns can be much higher, but so is the corresponding risk.

“With Hobart vacancy rates currently hovering at around 1%, this is also forcing rents up as the demand is high and good stock is limited in supply. With the local market projected by economists to remain buoyant and strong, at least for the next 18 to 24 months, it does provide good opportunities for investors who are being forced out of Sydney and Melbourne.”

Ian Hosking Richards, Rocket Property Group

“In recent years, the property market seems to have become a little less predictable. And whilst investors are sensitive to holding costs, most are looking for ‘safe havens’ with relatively low volatility. This means targeting the largest population bases with the most diverse economies. The problem with chasing yield is that, ordinarily, the higher the yield, the higher the risk.

“Darwin does not have a huge population compared to our major capital cities, and is quite dependent on resources, so there is risk. Equally, Hobart is the least populated of our capital cities and the economy is sluggish.

“The ideal investment would have reasonable cash flows, great potential for growth, and low risk. And because interest rates are historically low at the moment, you do not need huge gross yields to make property investing affordable, particularly if you stick to new properties with generous depreciation allowances. Therefore, I would say that Brisbane and southeast Queensland, or certain under-valued areas of Greater Melbourne, would have more appeal.

“If the investor really wants a high-yielding property in a low-risk area, the best way to achieve that is with a duplex, or dual occupancy property. In the right area, such as certain parts of The Sunshine Coast, you will get a yield much higher than in Hobart or Darwin, but without the downside that goes hand in hand with those particular locations.”

Related stories:

Property Investors Eyeing Opportunities In Tasmania

What Investors Need To Know About Interest Rates In 2017