Is the property market softening?

Home value growth stalled in May across the combined capitals index, according to the latest results from CoreLogic RP Data, with the slump most evident in Melbourne. So is this a sign the property market is softening? Tim Lawless, head of research at CoreLogic RP Data, doesn't believe so.

"I think this is probably more of a pause in the trend because most of the data we're seeing outside of the index reading from May is still showing really positive results, so auction clearing rates for Sydney and Melbourne are up towards a record high, above 75% to 80% week on week, and we're also seeing homes selling very rapidly," he says. "In Sydney it's only 26 days and in Melbourne it's about 30 days and we don't see many homes being advertised for sale, so the level of choice that is available for consumers looking to buy a home is still pretty slim. In Sydney it's about 25% lower than a year ago and in Melbourne listings are about 10% lower than a year ago. That shortage of advertised stock is one of the reasons we are seeing such urgency in the market from a lot of buyers, and homes selling so quickly."

Despite the recent results, could it be said that historically May produces weaker property readings?

"May is generally quite seasonally soft in our index and there is some seasonality in the reading," says Lawless. "But even saying that, considering the trend has been very strong, I think what we are seeing here is just a natural correction. It's one month of data and when you look at the trends for the last three months, you can see values rise by 1.3%. Sydney is still trending higher, quite quickly, as is Melbourne, so I don't think this one month of data really does signal an end to that level of growth.

"If we do see it next month, that could be the beginning of a trend being established, so we could probably answer these questions a lot more correctly with another month of data. But at the moment it's one month of data and seasonally it is generally a little bit weak in May and I think that the true test of whether or not market conditions are slowing will be seen when the June data comes out - my guess is that it will probably show a bit of a rebound in the rate of growth."

So as an investor, would it make sense to hold off buying property in the heated Sydney and Melbourne markets?

Lawless says he would probably be cautious about buying in Sydney and Melbourne, depending on what sort of housing stock it was. "I would be more cautious around the apartment market than I would with detached housing, just because there has been a lot of supply being introduced.

"Another reason for that caution is because there are probably markets that are showing better long-term fundamentals than Sydney or Melbourne - for instance, Brisbane. That's probably the prime example. We haven't seen a great deal of capital gain in Brisbane since 2008 and yields are substantially higher than they are in Sydney and Melbourne, where yields have been massively compressed due to the fact that rents aren't moving all that much at a time when values are rising so quickly. So Brisbane's yield profile is still quite healthy. And affordability is nowhere near as pressing as it is in Sydney and to some extent Melbourne. I think there are some better opportunities than buying in the Sydney or Melbourne markets based on those facts."

Where is the property market heading in the next six month?

Although it's difficult to predict where the property market is heading in the next six months or so, Lawless believes we'll see the same dynamic, with Sydney and Melbourne leading the charge. However, he wouldn't be surprised if these two markets start to moderate, as a result of APRA's intervention in tightening the rules for investor loans. So we're more likely to see some investment heat removed from the marketplace as getting finance becomes more challenging.

"And also naturally as affordability blockages hit the marketplace, then the low-yield profile acts as a disincentive, so I think we'll continue to see Sydney and Melbourne dominating the capital growth but potentially not quite as strong as, say, the 15%pa in Sydney at the moment and the 9%pa in Melbourne," says Lawless.

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