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Housing market strong as July ends

AAP logoAAP 1/08/2016 Garry Shilson-Josling, Economist

The housing market has shrugged off rising numbers of homes going under the hammer and has ended July on a strong note.

Prices in the mainland state capitals rose 0.3 per cent on average last week, led by solid gains in the two major markets of Sydney and Melbourne, according to property market analysis firm CoreLogic on Monday.

Annual growth in the five state capitals averaged 6.3 per cent, little more than half the 11.4 per cent pace a year earlier but still well above the official consumer price inflation rate of one per cent.

Only Perth recorded a weekly fall of note. Its 1.3 per cent drop was a major contributor to its annual decline of 5.6 per cent and the result of the unravelling of the mining investment boom.

Prices in Brisbane/Gold Coast were down by an inconsequential 0.1 per cent in the week, but there were gains in Sydney (up 0.6 per cent), Melbourne (0.5 per cent) and Adelaide (0.4 per cent).

Aside from Perth, the mainland state capitals posted strong annual increases, led by Sydney's 9.1 per cent gain and Melbourne's 7.5 per cent lift, while Brisbane and Adelaide both had annual rises in the four to five per cent range.

The solid performance came despite there being more properties up for auction - 1,585 last week compared to 1,329 the week before.

Also, the proportion of auctions ending with a sale - the auction clearance rate - jumped to 73.9 per cent. That compared to the previous week's 67.9 per cent and was nearly back to the high of 74.6 per cent a year earlier.

But, there are two clouds on the horizon.

One is a looming oversupply of apartments, something the Reserve Bank has mentioned in its regular commentary and which features in a report on Monday from industry forecaster BIS Shrapnel.

BIS associate director Kim Hawtrey said low interest rates had liberated pent-up demand and underpinned a building boom, but with slower population growth and many homes being built, supply is expected to grow faster than demand.

"This will see the national deficiency of dwellings gradually eroded and most key markets will begin to display signs of fatigue," he said.

The only exception, NSW, faced undersupply for a while yet, but it would soon join the oversupply party.

"Sydney is up against an affordability ceiling as well as constraints on site availability," Dr Hawtrey said.

"Investor demand is cooling, and the city will see a surge in new supply coming on stream over the next one to two years."

Another constraint is low rental yields facing investors.

A separate CoreLogic report on Monday showed that the average yield - rent as a proportion of the market value - in July was 3.3 per cent, an historic low, thanks to a combination of rising prices and stagnating rents.

Than means investors require increased capital gains to offset the smaller rental return, but the scope for that is being crimped by the looming oversupply of apartments and buyer resistance to high prices.

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