Sydney house prices have risen at their quickest pace in more than five years, surging three per cent in March on the back of lower interest rates.
The median house price in Sydney is now $690,000, with year-on-year growth standing at 13.9 per cent after slowing to 12.4 per cent in December last year.
Home prices across Australia’s capital cities rose 1.4 per cent in March, and three per cent for the first quarter of the year, according to today’s CoreLogic RP Data figures.
The median home price for capital cities now stands at $530,000.
Melbourne home prices rose 0.6 per cent to a median of $518,000, with Darwin and Canberra recording increases of 0.9 per cent to $540,000 and 1.9 per cent to $530,000 respectively.
MAXWELL: Home loan limits just hurt the underdog
The price rises come as the housing market begins to feel the impact of the Reserve Bank’s February interest rate cut, which sent the cash rate to a record low of 2.25 per cent, according to CoreLogic RP Data senior analyst Tim Lawless.
“Despite the headwinds of softer labour markets, very low rental yields, increased oversight on lending conditions and heightened economic uncertainty, historically low mortgage rates appear to be adding further stimulus to the housing market, albeit that stimulus is largely being felt in Sydney,” Mr Lawless said.
The latest housing market data is likely to present a further challenge to the RBA, which is tipped to cut rates again after its monthly board meeting next Tuesday.
A plunge in iron ore prices could see the RBA drop rates to soften income shock by lowering the exchange rate, but some economists are warning lower rates could create a speculative housing market bubble.
Financial markets have already priced in a 72 per chance of a further interest rate cut, which would could send home prices higher.
Mr Lawless warned risks of a price bubble in Sydney were emerging, with the low rental yields indicating the surge in demand was being pushed by speculative investors searching for capital gains.
“Clearly the vast majority of growth in dwelling values can be attributed to a very strong Sydney market that is largely fuelled by investment demand,” Mr Lawless said.
“The interest from investors is understandable, with housing currently offering up strong capital gains.”
But he warned once price growth slowed, there was a risk recent investors would be left holding “a very expensive but low yielding asset” with a lower expected rate of capital growth.
“From there it will be interesting to see if they bide their time in the housing market or exit to other asset classes with a stronger return profile,” he said.
Rental yields have tightened further in Sydney, 0.2 per cent lower to 3.6 per cent for houses since the end of December and 0.1 per cent lower to 4.3 per cent for apartments.
This article first appeared in The Australian Business Review