The RP Data - Rismark home value index results for May has confirmed a fall in capital city dwelling values by 1.9% over the month.

RP Data research director Tim Lawless says month-on-month fall in capital city dwelling values is likely due in part to seasonal phenomenon, but may also be indicative of a broader trend towards cooler housing market conditions.

For the first time in 12 months, dwelling values across Australia’s capital cities showed a monthly fall by dropping 1.9 per cent in May, with Melbourne leading with a -3.6 per cent reduction in values. Over the past three months capital city dwelling values were up 0.7 per cent, the lowest rolling quarterly rate of dwelling value appreciation since the three months ending June 2013.

Over the growth cycle to date, which commenced in June 2012, capital city dwelling values are up 13.9 per cent. According to Mr Lawless, the surge in values has largely been driven by strong market conditions in Sydney (+21.1 per cent).

Attributing the fall to both seasonality and more moderate housing market conditions, Mr Lawless comments that historically, housing market conditions have softened in April and May as the market rebalances from what is typically a seasonally strong first quarter and also as a result of cooler climatic conditions during the autumn and winter months. Outside of the seasonality, there are signs that the housing market is at or approaching the peak of the growth cycle.

By way of its cycle, Australia’s housing market has shown that a growth phase usually lasts around two years. Mr Lawless said that with affordability becoming more challenging and rental yields substantially compressed across Australia’s two largest cities, the growth trend may get moderated further over the year.

A recent deterioration in consumer confidence reported in the Westpac/Melbourne Institute Consumer Sentiment Index shows that this factor may also be playing a role in the winding down of housing market conditions.

According to the Index, consumer sentiment recently peaked in September last year and has since declined by 16.0 per cent. The May consumer sentiment results showed a significant fall away, which can be attributed to the announcements made in the recent Federal Government Budget announcement.

Across the broader price segments of the capital city housing markets, the premium markets have attracted the highest capital gain over the past twelve months with values in the most expensive quarter up 10.9 per cent compared with a 10.8 per cent lift in values across the broad middle 50 per cent of the market, and a 9.1 per cent gain at the most affordable quarter of the market.

Interestingly, over the past three months to the end of May, values have shown a fall by 0.5 per cent in the most expensive quarter of capital city dwellings while the most affordable end of the market has seen a 2.8 per cent rise in dwelling values over the same period.

Sydney’s housing market has led the way for capital gains with local values moving 21.1 per cent higher since the market reached a recent low point in May 2012. Rental rates over the same period have only increased by 6.3 per cent.

A similar trend can be seen in the Melbourne market where values are 12.3 per cent higher over the current growth cycle but rents have only shifted by 4.3 per cent. The net result is a substantial compression in rental yields across both of these cities.

Investors should be wary of such low yields, as the figures indicate dwelling values are too high relative to rents. Mr Lawless warns that if value growth continues to moderate in these low yielding markets, recent investors will be left holding a low yielding asset without a great deal of capital growth upside over the coming years.